What is an umbrella company?

In an ever-expanding contractor market, many contractors are faced with choosing between using an umbrella company or getting paid via agency PAYE for contracts inside IR35. You may be familiar with umbrella companies and may have even used them before, but for contractors who are new to the world of umbrellas, they might seem confusing at first. Here at Churchill Knight, we have created a detailed answer to the commonly asked question: “What is an umbrella company?”.

What is an umbrella company?

Umbrella companies employ temporary workers and act as intermediaries between a contractor and the end hirer or recruitment agency. Although the umbrella company is your employer and will process the payroll for your assignments, you will complete the work for the end hirer. It is important to note that umbrella companies do not find temporary work for you; this is done by the recruitment agency.

When you register with an umbrella company, you will sign a contract of employment and become an employee of the umbrella company. The contract of employment is an overarching contract, which means you are employed by the umbrella company both during and after your assignment has ended. Under this contract, you can accept multiple assignments simultaneously or consecutively or take a short break between assignments and still benefit from continuity of employment. If all assignments are paid via the same umbrella company, the contractor is only seen as having one employer (despite having multiple assignments). Therefore, your tax code will not be negatively affected.

This is different to being paid via agency PAYE as you will often only be paid and employed for the duration of the contract. If you accepted multiple agency PAYE roles simultaneously, it would be seen as having two (or more) forms of employment, and you would be taxed at a higher rate.

Your employment rights

Using an umbrella company provides the flexibility of contracting and the stability of full-time employment. When you sign and return the contract of employment, you will become an employee of the umbrella company. As such, you will have the same employment rights as a permanent employee and have access to statutory maternity/paternity pay and sick pay. For more information, please visit the government’s website.

Once your employment commences, you have the right to be paid at least the National Minimum Wage or National Living Wage at the agreed intervals set out in the Key Information Document. A Key Information Document will be provided to you by your recruitment agency before you agree or enter into any assignment. The document will outline the amount you are due to be paid and the deductions that will be made to your pay.

Unless you opt-out, the umbrella company must legally provide and enrol you into a workplace pension scheme if you are eligible. Please note, it is entirely your decision whether to use their workplace pension scheme, and you can opt out after the first deduction has been made. If you opt-out within the specified timeframe, all deductions will be refunded to you.

As an employee, you are also entitled to holiday pay. Your holiday pay must be deducted from your assignment rate and paid back to you when you claim your holiday pay. Most umbrella companies will offer you the option to have your holiday pay paid to you alongside your standard wage each time you are paid. Alternatively, you can choose to accrue your holiday pay and have it paid in a lump sum at a later date. For example, if you have a planned holiday, you would like to use the money.

How does an umbrella company work?

Some processes may differ between different umbrella companies. However these are the steps you should expect to complete when registering and using an umbrella company:

1. Choose an umbrella company you would like to use. We highly recommend an FCSA-accredited and SafeRec Certified umbrella company to ensure your pay is processed compliantly.
2. Register with the umbrella company over the phone or by completing an online registration form, and let your recruitment agency or end hirer know who you have chosen.
3. You’ll be required to read and sign a contract of employment, provide proof of identity and right to work in the UK, and a P45 (or Starter Checklist for PAYE if you don’t have a recent P45).
4. The umbrella company, recruitment agency or end hirer will exchange contracts and payroll information.
5. Depending on your recruitment agency or end hirers’ payroll processes, you may be required to complete a timesheet and send it to your umbrella company each week. If you are not required to submit a timesheet, the agency will send the umbrella company funds and a breakdown of how much you are due to be paid.
6. Once you’ve submitted your timesheet, your umbrella company will invoice your recruitment agency or end hirer for the week or month.
7. The recruitment agency or end hirer will then send the umbrella company the assignment rate, and the umbrella company will process your pay.
8. You will be paid and will also receive a payslip detailing the amount you have been paid and the deductions made.

How do you get paid as an employee of an umbrella company?

The umbrella company is responsible for paying you once they have received funds from your recruitment agency or end hirer and will process all tax deductions. We’ve broken down each element of the payment process so you know what to expect when you get paid.

The recruitment agency or end hirer will send the assignment rate to the umbrella company when you are due to be paid. The assignment rate accounts for your gross rate of pay (the amount you are due to be paid) and the employment costs. The employment costs are:

• The umbrella company’s margin
• Employer National Insurance Contributions
• Employer workplace pension contributions (if you don’t opt-out)
• Holiday Pay
• Apprenticeship Levy (if applicable)

The umbrella company will deduct the employer costs from the assignment rate along with the margin, which covers the administrative costs of processing payroll. The amount left is your gross rate of pay, and the umbrella company will process your employee tax deductions from this amount and pay these to HMRC on your behalf. The employee tax deductions are:

• Employee National Insurance Contributions
• Employee Income Tax
• Employee pension contributions (if you don’t opt-out)

If you are paying back a student loan, this deduction will also be taken from your gross rate of pay.

Who can use an umbrella company?

Most commonly, umbrella companies are used by contractors deemed inside IR35 because if you work through an umbrella company, you will not be affected by IR35 as tax is deducted at source before a net payment is made to the contractor. However, umbrella companies can be used by any contractor in any industry. If you would be interested in learning more about how they work or if you could benefit from using an umbrella company, please call our expert Sales Consultants at 01707 871622.

Churchill Knight Umbrella

Churchill Knight Umbrella is one of the first umbrella companies in the UK to be both FCSA accredited and SafeRec Certified, and with over 25 years of experience in contractor payroll we have helped thousands of contractors get paid each week and would be delighted to welcome you to the service.

For more information about our umbrella service or to request a free take-home pay illustration, please call our friendly team on 01707 871622.