The Umbrella Company – What You Need to Know

An umbrella company is a recruitment employment agency in the United Kingdom. Agency contractors are issued contracts to work under a fixed term of the assignment. Umbrella Company is created by the British Government to determine the employment status in the country and to make use of small company tax reliefs. About 14% of the professional contractors in the UK manage their business by working through an umbrella agency.

How it Works?

The Umbrella company is the employer. A contract of employment is signed by the contractors with the Umbrella company. This is also called as the contract of service. The umbrella company creates the timesheet and payroll and processes them. These timesheets are received from the contractors/employers. Then the umbrella company issues a invoice to the contractors for payment, who in turn sends to the client. The client pays the contactor through PAYE after offsetting some income for expenses like travel, accommodation, food and few more and claims them. PAYE stands for Pay As You Earn. The Umbrella company provides tax payments, social contribution and national insurance on behalf of the contractor.

The contract agency performs the recruitment on behalf of the client. Agencies provide PAYE scheme and hence the need/requirement of an Umbrella company. The client is the company for whom these contractors work for.  The companies/clients uses the contractors to not burden them with the legal requirements such as PAYE, national insurance, sick pays, maternity pays, etc.

Benefits of Umbrella Company

An Umbrella company offers two benefits to the contractors.

  1. Statutory Payments like Holiday Pay, Statutory Sick pay, Statutory maternity pay, etc.
  2. Employment Lifestyle benefits like dependent care, critical incident support, legal support and clinical counseling.

Charges of the Umbrella Company

A part of the charges from the umbrella company go for paying the contractors payroll or for the contractors insurances. It is usually a fixed weekly amount in the UK. If you are engaged in a number of assignments, then the allowable expenses are for travel, accommodation, mileage and professional subscriptions. Food and subsistence are allowed to be claimed very rarely by the Umbrella company. This applies only if you are away from your home for the reason of work.

If you work only on one assignment during the entire employment, then it is considered to be a permanent workplace. In such cases travel and accommodation cannot be claimed as per the HMRC’s definition. Tax relief is not available for home-to-work travel.