What is an Umbrella Company?

How do umbrella companies work?

In the UK, an umbrella company directly employs contractors and freelancers who work inside the IR35 regulations. Generally, an umbrella company's role is administrative and accountancy-based - such as managing timesheets, calculating PAYE tax and NI contributions, invoicing the client, collecting monies and paying the contractor.

Why choose an umbrella company?

An umbrella service gives you legal employee status and handles all the paperwork. It's the simplest solution for most contractors, with no unexpected tax bills and because you have one continuous employment it's much easier to secure important things like loans and mortgages too.

What happens when you join an umbrella company?

If you're new to contracting and fall inside IR35, then working under an umbrella company is arguably the best way for you to work. But what exactly does this involve?

Step 1

When you decide to join an umbrella company, it becomes your employer.

Step 2

The umbrella company invoices the agency or end client and the agency or end client pays the money direct to the umbrella company.

Step 3

The umbrella company will then deduct PAYE and National Insurance contributions before paying you your wage.

Umbrella Company FAQs

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What is the purpose of an umbrella company?

An umbrella company exists to provide an employment platform for contractors and freelancers who work inside the IR35 regulations on one or more temporary assignment.

Is it worth using an umbrella company?

If your contract falls inside the IR35 legislation it is likely to be the only alternative solution to PAYE direct engagement with your end-client or agency.

An umbrella company is ideal for short term contracts or your first foray into the world of contracting. Staying with the same umbrella gives you a continuous employment record and the right to statutory employment benefits.

Will I be entitled to statutory benefits using an umbrella company?

Yes, as well as being entitled to holiday pay, if necessary, you can claim Statutory Sick Pay. You will also be entitled to Statutory Maternity or Paternity Pay as appropriate. The National Insurance Contributions you make will help secure other state benefits including the State Retirement Pension.

Are umbrella companies regulated?

All umbrella companies must comply with tax and employment laws. An independent organisation – the FCSA (Freelancer & Contractor Services Association) accredits compliant umbrella companies and promotes best practice.

What is the best umbrella company?

The best umbrella will be the one which suits you best. Look for one with accreditation and check the feedback which other contractors have given it. Are the customer service team easy to contact and do they appear knowledgeable and have they answered any questions to your satisfaction? Only if you feel comfortable with your prospective umbrella should you go ahead and sign up.

In 2022, PayStream were named the UK's Best Umbrella Company for the second year running by an independent panel of judges at The Contracting Awards.

Does an umbrella company avoid IR35?

No. An umbrella company is designed for contractors who are working within IR35 but have chosen not to join an agency payroll or become a direct employee of an end client.

Am I classed as self-employed if I use an umbrella company?

No. Although you may be regarded as a contractor or freelancer both your employment and tax status, is that of an employee of the umbrella company. This is in contrast to a worker who operates as a sole trader or through a limited company (outside IR35).

Umbrella vs Limited Company

If you’re in the process of deciding whether to work through an umbrella or limited company, the choice will be influenced by whether your contract falls inside or outside IR35. In this video, we’ll give you a breakdown of the things you’ll need to consider for both options.

Maggie's first steps into umbrella contracting

Maggie recently decided to enter the world of contracting and found that her role fell inside IR35, meaning she had the choice of agency payroll or an umbrella company. Maggie chose the umbrella company route and decided to work through PayStream’s My Max umbrella service. We asked her how she found the set-up process and how life has changed since becoming an umbrella contractor.

Download the case study

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