What is an Umbrella Company

What is an Umbrella Company?

An Umbrella Company works by engaging contractors and freelance workers who work under a fixed term contract assignment and employs them on the same basis as any other business that employs staff. They then agree to provide the services of their employees to third parties such as agencies and end user clients.

This means that as an employee you will be engaged under an Overarching Contract of Employment, providing full employment rights and statutory protection. The umbrella company will then contract with the employee's agency or, in some cases, the end user client to provide your services on assignments with a number of different end user clients. Due to the temporary nature of the assignment work it is usually expected that the employee will work on a series of assignments at different locations and on this basis the employee will be able to benefit from any travelling and subsistence costs associated with carrying out work at your temporary workplace.

The Umbrella Company then issues invoices to the agency or end user client and when payment of the invoice is made, the Umbrella Company will typically pay the contractor through PAYE.

Umbrella companies have taken a more dominant role in the industry and certainly with the "IR35" legislation that creates tests to determine employment status and ability to make use of small company tax reliefs.

The main advantages of using an umbrella company include:

  • Avoids the time of running a limited company.
  • There is no need to be involved with running a spreadsheet, VAT returns, payroll matters, company accounts, taxation, etc.
  • For short-term contractors, a main advantage is not having to go through the process of forming a company and then arranging for it to be dissolved.