If you’re thinking of becoming a contractor, the two main ways you can work are through your own limited company or via an umbrella company.
We advise individuals who are serious about contracting or who want to work the most tax-efficient way as possible that working via a limited company is the best option for them. However, if you just want to tip your toe into contracting to see what it’s like, or don’t want the extra responsibility of running a limited company, working through an umbrella company is a good option too.
This article explains the benefits of working through an umbrella company and details how you’ll get paid.
What is an umbrella company?
An umbrella company is defined as “a company that acts as an employer to agency contractors who work under a fixed term contract, usually through a recruitment agency.”
Basically, instead of signing a contract with the agency or end client you sign a contract with the umbrella company, who effectively becomes your employer.
The process of signing up to and getting paid by an umbrella agency is as follows:
- Find a placement (typically through an agency). The umbrella company will then sign a contract with the agency
- You will sign a contract with the umbrella company
- Once you have worked your pre-set hours each week, you’ll complete a timesheet and pass this onto your manager for them to sign
- You’ll forward a copy of this timesheet (detailing the number of hours worked) to the recruitment agency and the umbrella company
- Your umbrella company will invoice the agency, who will in turn invoice the client
- The umbrella company receives payment from the agency and prepares to pay you using their payroll
It’s straight forward really!
Tip: Today, most contracts are found through recruitment agencies. It seems like some recruitment agencies have close ties with specific umbrella companies. The agency may make it seem like you have to use this umbrella company. You don’t! You are free to choose your own.
Benefits of an umbrella company
Working through an umbrella company is a stress-free way to contract. You don’t have the added paperwork that comes with being a director of a limited company. Plus, your tax and National Insurance Contributions are taken care of by the umbrella company.
In addition to this, as you are working through an umbrella company, you are entitled to receive full employment rights and benefits, like holiday, sick and paternity or maternity pay. Something you don’t get when working through a limited company.
Getting paid via an umbrella company
The main difference of working through an umbrella company versus working through your own limited company, is that all UK umbrella companies pay you PAYE. This is similar to, as if you were working as a permanent employee.
Therefore, you will be paid a salary net of Income Tax and National Insurance Contributions, plus the pre-agreed umbrella company’s fee and any other deductions, like pension contributions.
Ultimately, you will end up with less take home pay than if you worked through your own limited company, but you’ll also have less paperwork!
If you are interested in finding out further details on how to move into contracting, you can download our free guide to contracting, which explains everything you need to know. Or, if you’d like to talk to one of our Director’s about our umbrella service, give us a call on 01962 867550, or send us a message via our website.