Flexible monthly business insurance
Currently used by around 400,000 workers in the UK, umbrella companies are a popular option for those who want to bridge the elusive gap between being your own boss while still enjoying some of the benefits of being an employee.
If you’re wondering whether it’s time to join one and what the advantages are – grab a brolly. Here’s our guide to the pros and cons of umbrella companies.
What is an umbrella company?
An umbrella company is a company that acts as a third-party employer to those who work on temporary contracts. They act as a middleman between you and a client or recruitment agency. The main benefit of using an umbrella company is that they handle administrative and financial matters like payroll, tax and invoicing for the work you complete.
Umbrella companies are often used by self-employed contractors as an alternative to setting up a limited company. As well as paying you as an employee, they handle necessary PAYE deductions like tax, National Insurance and pension contributions.
How does an umbrella company work?
Chasing invoices and filling out self-assessment forms are laborious tasks, and they’re often enough to put people off wanting to be their own boss altogether. The good thing about an umbrella company is that it’ll take care of most of the paperwork for you.
If you’re unsure of exactly how umbrella companies work, here’s an overview:
- Your umbrella company signs a contract with the recruitment agency or end client that you will be working for
- You sign a contract with the umbrella company, becoming its employee and making your services available to its clients
- You submit a timesheet (either weekly or monthly) to your umbrella company with hours worked and any expenses
- The umbrella company pays you directly, making any necessary tax or pension deductions in the process
The umbrella company will also make a deduction from your earnings for its services. These services include:
- Processing timesheets
- Invoicing clients for your work
- Paying a salary for your work directly to your bank account
- Making necessary PAYE deductions like tax, National Insurance and pension contributions
- Claiming back expenses
- Handling statutory payments like holiday, sick pay and maternity/paternity leave
How much do umbrella companies charge?
The fee (also known as the margin) that umbrella companies charge varies depending on the services they offer. This is usually taken as either:
- A fixed weekly or monthly amount – anywhere between £20-£120 depending on the services
- A percentage of your earning
Most umbrella companies calculate their margin based on your income. You should take your predicted net income with a pinch of salt when using online calculators though, as your actual take home pay could vary widely depending on factors like expenses. Here’s a comparison from two different umbrella companies for a ballpark idea:
|Employer tax||Gross income||Employee tax & National Insurance||Monthly umbrella company fee||fee/margin|
Here are some other (weekly) charges from popular UK umbrella companies:
|UK umbrella company||Weekly fee|
|Umbrella Company UK||£12 (subject to referral promotion)|
|Churchill Knight||£12.50 (subject to referral promotion)|
|No Worries (Gold Service)||£21.25 +VAT|
It's worth checking out what these companies offer as part of their services, as this might be a reason for the differing weekly rates. But remember that any umbrella company that promises they can offer a greater net pay is a red flag.
At the very least, have a look at the reviews of the company you're thinking about picking to see what customers – past and current – are saying about them.
Why use an umbrella company?
A big draw of umbrella companies is retaining the main perks of self-employment like freedom over your hours, place of work and choice of projects, while also retaining the benefits that come with employment. These include:
- Administration – having client invoicing, payment and HMRC matters handled on your behalf
- Statutory rights like holiday pay, sick pay, maternity, paternity, and pension contributions
- It is more straightforward for short-term contractors who may not want to set up a limited company and then dissolve it
- Umbrella company fees are considered a business expense by HMRC so you won’t pay tax on them
But it’s not all sunshine and rainbows. There are some downsides to using an umbrella company. These include:
- Setting up a limited company can be more tax efficient – as under an umbrella company your status will be equivalent to a salaried employee
- You will pay fees, reducing cost effectiveness
- If you are on a percentage fee structure as a high earner you’ll pay much higher fees
- You’ll have less control over your finances and your net pay
Does IR35 apply to an umbrella company?
Umbrella companies aren’t impacted by IR35 off-payroll working rules, which is why they’ve become so popular for self-employed contractors on short-term contracts.
Contractors working for an umbrella company will have PAYE tax and National Insurance automatically deducted from their salaries in the same way as a full-time employee. To learn more, check out our guide to IR35.
How to choose an umbrella company
It’s important to do your research before signing on the dotted line, as there’s been a recent spike in tax avoidance schemes masquerading as umbrella companies. This coincides with changes announced to IR35 off-payroll working rules on the 6th of April 2021, making umbrella companies a more attractive tax option for self-employed short-term contractors.
If you were found to be using a tax avoidance system, it would be you who suffered the consequences, not the umbrella company – and the implications of that are very serious.
A simple way to be vigilant is that if something looks too good to be true (like suspiciously high promises of take home pay) it probably is. Here are a few other ways you can check a company’s legitimacy:
- FCSA or Professional Passport accreditation – this means the company undergoes an annual audit and assessment to confirm it is HMRC compliant
- Using Companies House to check if the company is UK registered – being based in a tax haven (such as the Isle of Man or the Cayman Islands) is a red flag
- Check if an umbrella company has been given an SRN (Scheme Reference Number) – this means it is being monitored by HMRC as potentially unethical and should be avoided
- Look for online reviews – legitimate companies tend to have a strong presence on platforms like Trustpilot
For more information, check the government guidance on tax avoidance schemes.
Umbrella company FAQs
Can you claim travel expenses through an umbrella company?
In simple terms, no. Think of an umbrella company as equivalent to full-time employment – you wouldn’t be able to claim back expenses on your daily commute, so a (compliant) umbrella company won’t claim these expenses for you either.
However, if you had to take a trip for work, or buy necessary tools or software while in full-time employment you would submit an expenses request to your workplace. Likewise, if you have expenses which you think fall into this bracket while working through an umbrella company, you will need to submit these to your recruitment agency and have them approved and paid on top of your salary. When it comes to necessary expenses incurred for your work (such as uniform, tools or working from home expenses) another way to claim tax relief on these is by submitting a self assessment tax return at the end of the year. .
Do umbrella companies pay holiday?
Yes, umbrella company contractors are entitled to statutory paid annual leave of 28 days a year. Check your employment contract for how holiday will be paid. Some companies will add holiday pay ‘rolled up’ to each payslip. Others will set aside holiday pay as ‘accrued’ to be paid when you take your annual leave or leave the company.
This content has been created for general information purposes and should not be taken as formal advice. Read our full disclaimer.
We've made buying insurance simple. Get started.
- 22 December 20216 minute read
Freelancers and the self-employed pay their National Insurance contributions a little differently to people employed by a company. Read our guide to the ins and outs of how National Insurance works for the self-employed.