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Umbrella companies have become more popular in the UK over the past ten years. Despite this popularity, many people are still unaware of exactly how an umbrella company operates – and the benefits they can get by opting for this solution. Umbrella companies are considered headache-free, because they handle all administration for you, and give you the opportunity to offset some business expenses against your taxes.

Not sure if umbrella companies are the right fit for you? Our guide will tell you all that you need to know about this type of structure and help you to make an informed decision.

What is an Umbrella Company?

In essence, an umbrella company is a limited company operated by a third party, which acts as a contractor’s employer. It also serves as an intermediary between the contractor and the end client or recruitment agency. The main function of an umbrella company is to organise payment for the contractor on a PAYE basis; this is done by collecting your earnings from the end client or agency and paying you after tax and National Insurance, as well as the umbrella company’s fees, have been deducted.

The umbrella company also offers a payroll service to its employees and processes timesheets and invoices. You may be able to reclaim certain business expenses you incur, but that will depend on whether your contract is considered to be under the ‘Supervision, Direction and Control’ (SDC) of your client. If it is, you won’t be able to claim travel or subsistence.

How Do Umbrella Companies Work?

Simply put, if you choose to operate through an umbrella company, they will sign an agreement with your recruitment agency; your agreement will be with the umbrella company. The umbrella company becomes your employer and you’d have to send your timesheet to them; the company would then bill your client and prepare your payroll once they received the payment.

You’d get paid by the umbrella company after income tax and National Insurance contributions have been deducted. You also need to consider that the company will deduct a pre-arranged fee for their services and make other deductions, such as pension contributions. You can instruct the umbrella company to invoice your clients on a weekly or monthly, depending on your timesheet. This document has to be sent to both your agency and the umbrella company and shows how many hours you worked during that week or month.

Joining an umbrella company scheme is a quick and easy process which offers a wealth of advantages.

How Do Contractors Benefit from an Umbrella Company?

After deciding to become a contractor, the first thing you need to think about is the business structure you’ll want to work under. Umbrella companies provide a hassle-free way to contract, which is why it’s the preferred structure of many contractors in the UK. Here are some other advantages:

Ideal for Short-Term Contracts – If you’re still testing the waters and aren’t sure if the contractor life is for you, operating through an umbrella company is the perfect solution for figuring it out; after all, you won’t have to go through the process of forming your own company and then arrange to dissolve it. It’s also ideal if you’re earning less than £25,000 per annum (or £15 per hour) or operating in the public sector.

Less Admin Work – The umbrella company handles the administrative and financial hassle, especially when it comes to income tax, National Insurance contributions and VAT returns. You also won’t have the directorial duties of a limited company.

Leave When You Want – When you set up a limited company, you’ll become its director, meaning rules and legislation involved will be different. Due to this, it’s easier to leave an umbrella company than it is your own limited company, since you’re considered an employee.

Entitled to Benefits – Because you’re an employee of the umbrella company – not its partner or director – you’re entitled to employee rights and benefits. These include, but are not limited to, sick pay, holiday pay and maternity leave.

Insurance Through Umbrella Company – Umbrella companies that are trustworthy will provide you with insurance while you’re working on your assignments – and at no extra cost. You may get Employers’ Liability Insurance, Public Liability Insurance and Professional Indemnity Insurance, for example.


Downsides of Umbrella Companies

While the umbrella company structure is ideal for a lot of contractors, it’s not for everyone, as there are also some downsides that you should keep in mind when making your decision. These include:

Fewer Tax Benefits – While limited companies allow you to receive certain tax benefits, operating through an umbrella company means that all of your income will be in the form of salary, due to the Managed Service Company legislation.

Less Control – For many, the fact that limited companies allow them to take control of all aspects of their business, from payroll to taxation, is what attracts them to this business structure; however, the same is not true of umbrella companies, since someone else would be handling it all for you, and you wouldn’t be running your own company.

Higher Costs – This business structure can be more expensive, because everything the company does for you, from client invoices to admin, will incur a fee.

Which Expenses Can You Claim Through an Umbrella Company?

Choosing this type of structure allows you to claim back certain expenses and receive tax relief against allowable earnings and deductions. Make sure you estimate your expenses correctly, because HMRC’s rules are strict in regard to this, mainly travel expenses.

Business expenses mean expenses you incur exclusively during the performance of the duties of your employment, so it can be anything from software subscriptions and equipment costs to certifications and specialist tools. Travel costs, on the other hand, are another matter; commuting time can’t be claimed as an expense, even if you incur costs such as fuel mileage or public transport.

However, if you have travelling appointments, you can deduct the costs as expenses, including delivery driving and door-to-door sales. If you’re in this situation, you are classed as an itinerant worker. Being considered an itinerant worker depends on the frequency of travel, the work you do and where your home is located relative to your usual area of work.

Travel between different clients or places can be claimed as long as the work is completed for the same employer; contractors, as self-employed individuals, may complete several different jobs in one day for independent employers. Each different journey is treated as travelling to your workplace, so you won’t be able to claim anything.

If you operate through an umbrella company, you’re considered an employee; so, every time you travel from site to site, your travel is seen as ‘on the clock’, allowing you to claim these expenses back.

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How do Umbrella Companies Calculate Your Take-Home Pay?

All umbrella companies operate PAYE, so you will pay your tax as you earn your salary. The percentage of National Insurance contributions deducted from your earnings is always the same, no matter which company you choose. Income tax, however, is another matter, as it varies depending on how much you earn per annum.

Your personal tax code shows how much you can earn before starting to pay tax. For example, if your code is 1185L, which is standard tax code, you can earn up to £11,850 per year before being taxed. Earnings up to £34,500 will be taxed at 20%, while earnings between £34,501 and £150,000 will be taxed at 40%. Anything above £150,000 is taxed at 45%.

Use our contractor tax calculator to figure out how much your take-home pay is.

How to Choose the Best Umbrella Company For You?

Choosing the right umbrella company for you can be a challenging process involving a lot of research. You want to make sure that you’re getting the best possible deal, so make sure you’re making the right decision. Certain important aspects you will want to consider include knowing whether the company is tax compliant, how long they take to process payments, if they offer an expenses model, whether they have the right experience, and the fees you’ll have to pay.

It’s crucial that you can trust whoever is handling your pay, so choose a company that is qualified or has a lot of experience in providing payroll. When browsing, you’ll want to be mindful of certain claims, as well. For instance, some companies will advertise the seemingly impressive ‘IR35 compliant’ label; while being up-to-date with this legislation and getting the best IR35 advice is crucial, don’t make your decision based on this. After all, IR35 doesn’t affect contractors working through umbrella companies, because they’re taxed under PAYE and are considered employees.

Similarly, claims of being ‘HMRC-approved’ are just as meaningless. HMRC doesn’t actually approve companies, they simply allow the umbrella company to simplify how expenses are accounted for.

Another thing to keep in mind is that you should compare the benefits offered by different companies before making a decision. These specific benefits include:

Holiday and Sick Leave – Check sick leave policies, as umbrella companies have to pay you statutory sick pay after four consecutive days away from work. Some companies will also pay an additional 12.07% to cover your annual leave.

Insurance Cover – Umbrella companies are required by law to hold employer’s liability insurance, which will protect you if you become unwell or injured at work. Public liability and professional indemnity insurance are not a requirement but are recommended.

Payment Models – Always make sure to figure out how and when you’ll be paid. How long does it take you to receive your salary once you’ve submitted the timesheet? Will you be paid monthly or weekly? Does the company ever hold back funds for contingencies? Does the company answer your payments queries thoroughly? These and more questions can help you to decide which umbrella company will be best-suited for you and your requirements.

Additional Costs – Some companies will charge you extra fees, so it’s crucial that you discuss this beforehand. Double check whether there are joining or leaving fees, and whether you’ll be charged for same-day payments.

Pension Scheme – Another benefit to consider is the possibility of paying into a pension scheme while working with an umbrella company, especially considering that pensions are also one of the few tax breaks available to you as a contractor. Auto-enrolment legislation means that the company should offer you a pension scheme; however, be aware that any contributions have to be made into the umbrella company’s scheme, which means you can’t pay into a personal one to receive these tax benefits.

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Gorilla Accounting as an Umbrella Company

What do you get when you choose to operate through Gorilla Accounting? As contractor accountants, you can benefit from our considerable knowledge and expertise at all times. Gorilla Payroll is our highly-powered business partner that provides an all-inclusive service – no unexpected costs and no start-up fees. The world of contracting is always changing, so we want to make life as easy as we can for you by having no tie-in periods or cancellation fees.

With Gorilla Payroll, you won’t have any directorial duties, because you’ll be outsourcing the responsibility to us; in addition, you’ll reduce your administrative and financial hassle by allowing us to take care of your National Insurance contributions and Income Tax. Specifically, you’re entitled to employee rights and benefits too, such as sick pay, holiday, pay, maternity and paternity pay and employer’s insurance. 

Our application process is quick and easy, and you’ll be an employee of Gorilla Payroll in no time. But our help doesn’t end here; if you decide you wish to set up your own limited company, we can also set this up for you and transfer you to our monthly accounting package. We’ll also be on hand any time you need us, so you can be confident that any potential issues will be dealt with swiftly and efficiently.

Contact us if you wish to learn more about umbrella companies or any of the other services we can offer you; we’ll handle all of the hassle of admin, so you can focus only on your job and on growing as a contractor.