What are umbrella companies, and how do they work?

So what are Umbrella Companies and how exactly do they work?

With more and more assignments being handled by contractors each year, umbrella companies have become an increasingly popular solution in recent times. If you’re a contractor, you may well come across them at one stage or another. Before jumping straight in at the deep end, though, you should first educate yourself about what they are, and how they work.


Only then will you be able to decide whether this type of partnership is in your best interests. Here’s all you need to know.


What is an umbrella company?


PAYE umbrellas companies are standard UK limited companies. They essentially serve as an ‘employer’ to contractors by providing the intermediary services between a recruitment agency or end client and the contractor who will be conducting the work.


Essentially, their job is to help contractors reclaim their legitimate business expenses, including travel and subsistence, without breaking SDC (Supervision, Direction and Control) regulations or IR35 legislation.


The umbrella company provides payroll services to its employees, processing timesheet, expenses and invoices.


A brief look at the intermediary process


For contractors considering the concept of joining an umbrella company, it’s important to know exactly what to expect. Here are the eight simple steps that will be completed.


  • Once the umbrella company is confirmed as your ‘employer’, they will sign a contract with the recruitment agency.
  • You, the contractor, will sign a contract with the umbrella company.
  • You’ll complete the agreed work as a contractor before completing the timesheet and having it signed off by a manager.
  • You will submit the confirmed timesheet to the recruitment agency as well as the umbrella company.
  • The umbrella company will invoice the recruitment agency (or end client).
  • The recruitment agency will pay the invoice to the umbrella company, who will subsequently prepare your payroll.
  • The umbrella company will pay you your salary. They will have factored in income tax, national insurance, pension payments, and their agreed weekly/monthly fee. They’ll also reimburse acceptable expenses.
  • Finally, you can claim any extra expenses against your income tax bill at the end of the financial year.


While the exact methods used for processing timesheets and other key documents may vary slightly, the above process will be accurate regardless of the PAYE umbrella company selected.


Finding the right umbrella company for you


The growth of umbrella companies over the past 20 years has been quite exceptional, and there are now hundreds of companies offering this type of service up and down the country. Therefore, finding the perfect solution for your needs can feel like an immensely difficult task.


Ultimately, though, it boils down to a being a decision about finance and customer care. Use the weekly/monthly fee as your main barometer while additionally asking for recommendations regarding customer care, and you won’t go far wrong.


Before doing anything else, though, you’ll want to check that the umbrella company partnership is actually needed. If working as a Limited Company is a better solution that won’t break any tax regulations, don’t be afraid to take that route. The best decision is the one that works for you.


If you are a contractor and need to compare umbrella companies then get started here