An umbrella company is a special type of Limited Company

Umbrella Companies exist for the sole purpose of employing “self-employed contractors” so that they can carry out short term assignments without the hassle of sorting out their own taxes or invoicing for their work. Most often the contractor will have found work through an agency, but not necessarily so.

The umbrella company acts as an ‘employer’ on behalf of its contractor employees. A contract is signed between the umbrella company and recruitment agency (or end client) on behalf of the contractor who will be carrying out the assignment.

The umbrella provides a payroll service to its employees, processes all timesheets and invoices, and pays its employees a salary after allowing for deductions.

Contractors use umbrella companies because:

  1. Their contract is within IR35
  2. Their contract is outside IR35 but they don’t want to additional burden of running their own limited company.

When you work with an umbrella company the process is:

  1. Once you have secured a contract role, the umbrella company (as your ‘employer’) signs a contract with your recruitment agency.
  2. You will also sign a contract of employment with the umbrella.
  3. Once you have completed a pre-agreed time period on site, you complete a timesheet and pass it on to your manager to sign.
  4. Submit your timesheet to both your recruitment agency, and umbrella, showing how many hours you worked that week / month.
  5. The umbrella company will invoice the recruitment agency, which subsequently bills the end-client.
  6. Once the umbrella company receives payment from the agency, they can prepare your payroll.
  7. Your umbrella will process your payroll, and pay you a salary, following deductions for taxes (income tax + National Insurance), the pre-agreed umbrella fee and any other deductions (for pension contributions, for example). They will also reimburse you for certain allowable expenses you have claimed – such as mileage.

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