Key Facts Umbrella Companies
An umbrella company is a Limited Company that employs agency contractors who work on temporary contract assignments in the UK secured through a recruitment agency. An umbrella company acts as an employer to the contractor placed by the recruitment agency.
Many contractors and freelancers use umbrella companies, as a convenient way to be paid like a regular employee as opposed to being self-employed or having to register their own limited company.
The step by step process of how an umbrella company operates
Once you have secured a position with Professional Placement for a temporary assignment with one of their clients, they will provide you with an umbrella company from their "Preferred Supplier List" which is fully compliant with UK tax and employment law requirements. Professional Placement only works with reputable and reliable umbrella companies.
Professional Placement will issue a contract to the chosen umbrella company, who will act as your employer. As a contractor you enter a contract directly with the umbrella company. You can then carry out a number of temporary contracts without the need to manage your own payroll.
As a contractor you will submit a timesheet and expenses information to your employer ‘the umbrella company’ and Professional Placement on a contractually-agreed timescale for the hours you have worked. You will also need to record your deductible and reimbursable expenses, such as travel costs, and send them to your umbrella company and Recruitment agency as well.
The umbrella company will then invoice Professional Placements for the work you have provided based on the hours handed in on your signed timesheets and for any deductible and reimbursable expenses you may be entitled to.
Once the umbrella company has received payment by Professional Placement, they will pay the contractor through Pay As You Earn (PAYE). This includes also any reimbursements from the client for expenses you have accrued and notified your umbrella of.
The umbrella company will handle the necessary deductions, such as correct tax, PAYE and National Insurance contributions, a pre-arranged processing fee for the umbrella company and any other deductions, if applicable such as pension contributions and retained holiday pay.
After allowing for the above-mentioned deductions, the umbrella company pays out the remainder of your earnings as a net salary amount to the contractor.
The contractor will receive a monthly payslip detailing all the deductions that have been made.
At the end of the tax year, the umbrella company will provide the contractor with a P60 (End of Year Certificate) and P11D (detailing any expenses claimed).
Advantages using an Umbrella Company
No need to set-up a limited company
There is very little paperwork involved apart from handing in timesheets and expenses claims
They are suitable for long- and short-term assignments
They are taking away the stress of doing your own payroll
They give you the assurance that taxation and employment legislation is fully adhered to
They are not binding - you can always switch to a limited company
Receiving many benefits usually associated with permanent employment such as, statutory sick pay, holiday pay and statutory maternity/paternity pay, and the option for tax-free workplace pensions.