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As a contractor, you may have come across the term ‘umbrella company’ when selecting your payroll option when receiving a new assignment. So, what is an umbrella company? An umbrella company is a payroll service provider for contractors and freelancers which handles tax and payments through PAYE. It acts as your employer, ensuring compliance with UK laws.
If you’re contracting, you have two primary payroll options: Agency PAYE, or Umbrella Employment. This guide explains how umbrella companies work, what they offer those on fixed-term contracts, and why they’re a popular payroll choice for contractors.
What is an Umbrella Company?
An Umbrella Company (also called a ‘Payroll Umbrella’ or ‘Employment Umbrella’) provides payroll services for contractors. Their business model works by acting as the legal employer of the contractor, and processing their pay through PAYE. Umbrella companies are also responsible for providing the usual employment benefits such as sick pay, maternity pay, workplace pension contributions, etc. We’ll cover this in more detail below.
First, here’s quick overview of the Umbrella Employment system from our Head of Umbrella, Daniel Broughton.
What do Umbrella Companies do?
Umbrella companies employ workers who are on fixed term contract assignments. They act as an intermediary between yourself – a contractor – and your end client or agency. Your agency pays the umbrella company, who then pay you, the contract worker, through PAYE – as if you were a full-time employee. This means that tax and National Insurance contributions (NICS), for instance, get deducted by the umbrella company on your behalf. It’s a process that serves to simplify your administrative and financial responsibilities. So, you don’t have to worry about filing things like tax returns.
How does Umbrella Company Employment Work?
1. Agreement & Onboarding
Once you’ve selected your umbrella company, they’ll sign an agreement with your recruitment agency or end client.
2. Becoming an umbrella employee
A contract of employment will then be signed between you (the worker) and the umbrella company. You’ll then be an employee!
3. Timesheets & Invoicing
You’ll be required to provide a timesheet detailing your hours of work for each payment cycle, as well as any chargeable expenses. Your umbrella company invoices your end client (or agency).
4. Getting Paid via PAYE
Your umbrella company takes care of things like Tax, NICs and other deductions required by law. They also retain their margin before paying you direct into your bank account via PAYE. You’ll get a payslip and reconciliation sheet, detailing each wage you receive, every time you’re paid.
What are the Benefits of an Umbrella Company?
Umbrella companies handle payroll for contractors, while offering statutory employment rights and benefits such as continuity of employment, insurance and HR Support.
Umbrella companies serve to support your contracting career. They’ll remove your administrative burden and make sure you’re paid on time, every time. A good umbrella company, should give you the benefits of permanent employment, while keeping the flexibility of contracting. Benefits include:
Statutory Employment Rights
As soon as you join an umbrella company, they should make you aware of your statutory employment rights. This includes things like holiday pay, sick pay, and maternity/paternity pay, which you are entitled to as a full-time umbrella employee.
HR Support
Umbrella employees should have access to a professional HR department that can provide guidance and support for when things aren’t running quite so smooth. This includes anything from notice or pay disputes, to unfair dismissal.
Continuity of Employment
As a contractor, you may have multiple end-clients, with contracts running simultaneously. But with an umbrella company, you’ll only ever have one employer. Your contract will persist even when looking for a new assignment. As an employee, continuity of employment will make it easier to get credit or apply for mortgages.
Insurance
Regardless of your selected provider, you must make sure you’re covered. Certain umbrella companies provide necessary insurance, as standard. This enables you to carry out your work in a safe and secure manner. Some umbrella companies, though not all, also provide things like health, life and accident insurance at no extra cost. With Danbro, you’re automatically covered by our Public Liability insurance and Employers’ Liability insurance, as well as Professional Indemnity insurance.
For more information, check out our blog ‘Why do Umbrella Companies exist?’
DID YOU KNOW? With Danbro Umbrella, you’ll only pay a margin when we process your pay. So, you don’t pay a penny if you’re not working.
What is an 'Overarching Contract'?
An overarching contract is a special type of employment contract, which links together a series of separate assignments. Under this agreement, a temporary worker becomes an employee of the employment umbrella and receives payment through them. This is confirmed by the inclusion of certain provisions in the contract such as ‘constituting a genuine employment relationship’.
What happens when my assignment finishes?
When contracting under umbrella employment, you’ll be in employment both during and after your assignment. That continuity will help you when taking out a mortgage, for instance. It also provides the flexibility of contracting and the stability of full-time employment. Danbro Umbrella work with a national network of recruitment agencies, covering all sectors. If you don’t get paid for five weeks, we’ll get in touch to see how we can help. Likewise, if your assignment comes to a close and you don’t have another one lined up, you can get in touch with your payroll team.
Can I claim expenses as an Umbrella Company Employee?
As a contractor you may incur expenses that your agency has agreed to reimburse. These expenses are often referred to as billable or chargeable expenses.
You can claim chargeable expenses through Danbro Umbrella. These expenses will be offset against tax and National Insurance, as long as your agency confirms they are reimbursing you. To do this, simply submit an online claim through our portal, including supporting VAT receipts.
If your agency isn’t reimbursing certain expenses, you might still be able to claim tax relief by submitting a claim to HMRC via a P87 or self-assessment. Just remember to keep all receipts as proof of your expenses.
Will I get a Workplace Pension?
Yes. A contracted worker employed by an employment umbrella – or professional employment organisation – should be enrolled into a pension scheme upon joining, providing they meet certain criteria. With our umbrella employment solution, you’ll have access to the Danbro Group SIPP pension scheme from the first day of your employment with us. It’s important to note that, by law, your employer must assess your eligibility and enrol you automatically before you can opt out of a pension scheme.
Will I have to pay more tax with an Umbrella Company?
No, you should not have to pay more tax through an umbrella company. Your umbrella payroll provider will only deduct the necessary tax and National Insurance contributions from the sum they handle for you. So, you should not pay anymore tax than if you were working under agency PAYE. This is done through the PAYE (Pay As You Earn) system, just as it would be if you were working as a permanent employee or under agency PAYE.
All umbrella companies are required to follow strict rules and regulations set by the government. This means that every compliant umbrella company will deduct the same amount of tax and contributions. If you’re offered an unusually high take-home pay by an umbrella company, it could signal a tax avoidance scheme. Tax avoidance schemes are illegal and could lead to significant financial risks.
When you register with Danbro Umbrella, we’ll ask you about other jobs you’ve had and money you earn. We do this to ensure that you’re on the appropriate tax code and are paying the right amount of tax.
Employer's National Insurance: How does it work?
All employers are legally obliged to pay Employer’s National Insurance (ENI) to HMRC. However, it’s often misconstrued that umbrella companies are making illegitimate deductions from pay when ENI gets taken from the money they’ve earned. This is false. ENI must get paid to HMRC by whoever establishes themselves as your employer.
Under Danbro’s employment umbrella company, you are our employee. Therefore, we bear the cost of employment. In practice this means your assignment rate gets uplifted to account for costs such as ENI, the Apprenticeship Levy, tax, etc. So, the money you take home is the same amount that a permanent employee would earn for the same job. All the deductions required by law have been compliantly taken.
Your payslip should clearly outline any deductions to ensure your take-home pay is transparent, with no hidden fees. Hence the importance of selecting a consistent and compliant umbrella provider.
DID YOU KNOW? Danbro Umbrella have operated in the contractor industry for over two decades. We’ve got longstanding relationships with many of the UK’s top recruitment agencies. We process around 200,000 contractor payments every single year.
Umbrella Company Mythbusters!
Many people who’ve considered umbrella employment as an alternative to more ‘traditional’ types of work will have heard more than a few misconceptions about umbrella companies. Here are just a few of the falsehoods to be aware of:
‘Umbrella companies are liable when it comes to HMRC investigations.’
Contractors often overlook the fact that HMRC can choose to investigate any individual’s tax affairs, regardless of their employment arrangement. So, if it transpires that business expenditure, for example, has been claimed fraudulently, you (i.e. the umbrella worker) are liable for any tax or penalties due.
‘Umbrella companies avoid tax!’
If you’re using a reputable, FCSA regulated, HMRC compliant provider, there should be no cause for concern in this regard. However, be aware that joining an umbrella company that promises conspicuously high take-home pay could be dangerous. Particularly if they’re involved in something called a ‘contractor loan scheme’. HMRC have deemed this practice as tax avoidance. Remember, it’s you who’s liable if there’s found to be any wrongdoing in relation to your tax. So, if it sounds too good to be true (like ‘keep 90% of your tax’, or, ‘keep 90% of your contracted rate’), it often is.
‘Umbrella employees are subject to IR35.’
Intermediaries Legislation, or IR35, is a very significant tax law, affecting freelance contractors. Its aim is to prevent individuals who would ordinarily be viewed as an employee, from offering their services through a limited company – usually in order to avoid paying Income Tax and National Insurance contributions. The government introduced IR35 to deal with the issue of ‘disguised employment’. So, its impact is felt by those falsely positioned as sole traders and limited companies. Umbrella company employees, on the other hand, are generally outside of IR35.
Choosing an Umbrella Company
So, if you’re thinking of joining an umbrella company, or looking to switch to a different provider, there are a number of considerations to make. In the UK, there are countless umbrella payroll providers competing for your interest. Choosing the right one is crucial. After all, this is your livelihood and it’s a decision that could have a lasting impact on your financial future. The best employment umbrellas provide rewards, security, and all the benefits of permanent employment. But take heed, the worst companies can cost you time, money and a whole lot more besides. Danbro Umbrella’s dedicated team will give you a full consultation to help you find the solution that’s right for you. You’ll also get a sample calculation to give you a better idea of your take-home pay.
TOP TIP: Do your research! As with any service provider of this nature, it’s advisable to check the accreditations of your prospective umbrella company. FCSA, PRISM, CFA and APSCo, for example, are all desirable regulators to receive endorsement from.
What happens if I work for multiple companies/agencies?
At Danbro, we retain one margin per timesheet processed. So, if you’re working on an assignment for more than one agency during the same week/payment cycle, we need to know the details so we can process your payment correctly. If we process more than one timesheet as part of your payment, we’ll retain one margin for each timesheet processed in that period.
How do I join an Umbrella Company?
Registration with Danbro Umbrella is swift, simple and stress-free using our sign-up portal.
