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An umbrella company is an intermediary company that formally employs independent workers, who are then assigned temporarily to client companies. Umbrella company solutions are most popular in the UK.
- An umbrella company is a popular HR solution in the UK, similar to Employer of Record (EOR) and payroll outsourcing solutions.
- Typically, an umbrella company works in tandem with a recruitment company and a client company, with the umbrella company taking over the administrative and tax responsibilities of employment.
- Top umbrella companies in 2024 include Caroola, Swapp Agency, Access Financial, and Churchill Knight.
What is an Umbrella Company
An umbrella company in the UK is an employment intermediary that acts as an employer to agency contractors who work under fixed-term contracts, usually through a recruitment agency. The end client does not directly employ these contractors; they work for the umbrella company that handles their payroll and taxes.
The umbrella company contracts with a recruitment agency or end client and then employs the contractor to carry out the assignment. For the contractor, the umbrella company simplifies the process of getting paid. It invoices the recruitment agency (or client) for the work the contractor has completed, collects the payment, deducts Income Tax and National Insurance contributions through the Pay As You Earn (PAYE) system, and then pays the contractor a net salary.
This arrangement benefits contractors by removing the administrative burden of running a limited company, particularly the accounting and tax responsibilities. It can also be a more suitable option for those contracting in the short term or who want to avoid dealing with the complexities of setting up and managing a limited company..
However, it’s important to note that not all umbrella companies operate compliantly. The sector is currently unregulated, so contractors must be vigilant and ensure they are working with a reputable provider. A compliant umbrella company should provide transparency regarding fees, deductions, and employment rights.
TOP 4 Umbrella Company Cost Comparison
Per employee per month in £UK
|Accountancy, tax services, company incorporation
|Full UK EOR and PEO services
|Payroll, work permits, EOR services
|Accountancy, tax returns, wealth management
For independent professionals and consultants, the administrative burdens of traditional company setups can be confusing. This is where the concept of an umbrella company comes into play.
Instead of taking on the compliance burden of setting up their own UK Limited Company, contractors can sign up with an umbrella company. An umbrella company acts as an intermediary that employs contractors while they are assigned short-term to various clients.
The umbrella company handles all administrative responsibilities, including tax and national insurance contributions.
Below, we look at how umbrella company arrangements work and identify who some of the top umbrella companies in the UK are.
Umbrella Company Arrangements — How Do They Work?
The process of collaborating with an umbrella company typically follows these steps:
Contract Agreement: The umbrella company contracts with the recruitment agency, laying the foundation for their partnership.
Individual Contract: As a contractor, you sign a contract with the umbrella company, formalizing your association. At this point, you become an umbrella company employee.
Assignment Completion: You complete your assignment with a client company and submit your timesheet, which your manager approves.
Invoice Transmission: The umbrella company invoices the recruitment agency, initiating payment.
End-User Payment: The invoice is forwarded to the end-user, who makes the payment. Initially, this payment goes to the umbrella company.
Payment Processing: The umbrella company receives and processes your payment using its payroll system. Deductions, such as tax and national insurance, predetermined fees, pension contributions, and insurance, are applied as necessary.
Payslip Issuance: You receive a detailed payslip from the umbrella company outlining all deductions and your final take-home pay.
Why Contractors Choose Umbrella Companies
The question arises: Why do contractors opt for umbrella companies? After all, the independent contractor could operate as a sole trader or set up their own UK Limited Company. They would then pay their income tax and make all the deductions themselves.
The answer lies in the following benefits of umbrella company solutions:
Streamlined Operations: Working with an umbrella company simplifies administrative aspects of employment, allowing contractors to focus on their core work. The administrative burden lies with the umbrella company.
Efficient Management: Administrative and financial tasks, which can be challenging for contractors, are expertly handled by the umbrella company. This includes financial software usage, VAT return filing, payroll management, professional indemnity insurance, and company accounts oversight.
Compliance: Contractors who operate as sole traders or via their own limited companies become liable for all contracting tax and compliance elements. These risks can be mitigated by working through an umbrella company with employers’ liability insurance.
Video — Umbrella Companies Explained
How Umbrella Companies Deal with National Insurance Contributions
The umbrella company takes all the administrative and financial employment responsibilities in the UK. This means they take care of:
- Holiday pay. Most workers in the UK are entitled to 5.6 weeks of holiday per year
- Statutory sick pay. This is an amount of £109.40 per week if the individual is too ill to work. The umbrella company pays it for up to 28 weeks.
- Employment rights. The umbrella company is responsible for ensuring that the worker is paid in full compliance with legal requirements, such as minimum wage laws.
Perhaps most significantly, the umbrella company also oversees National Insurance Contributions. These cover:
- A basic state pension scheme. To ensure that all individuals can retire with some basic income.
- A contribution-based employment and support allowance. A form of unemployment benefits that individuals pay into.
- Maternity allowance. Payments for individuals who go on maternity leave.
- Bereavement support payments. Amounts payable when a family member or someone else just as close has died.
Expenses are crucial to contracting through an umbrella company: Contractors can rest assured that legitimate business expenses are reimbursable. These expenses are typically reimbursed by the client or, in some cases, by the recruitment agency, per contractual agreements. Such expenses are commonly known as “chargeable expenses.”
It’s important to note that the reclaimability of expenses may be influenced by the “Supervision, Direction, and Control” (SDC) framework. Expenses may not be reclaimable under SDC conditions. Contractors should evaluate their employment agreement to determine whether it falls under SDC and act accordingly.
Evaluating Umbrella Companies
Recruitment agencies often recommend supplier schemes linked to umbrella companies for business professionals embarking on contracts. While these options have merit, thorough research is essential before committing.
Online resources and contractor comparison websites offer valuable information about umbrella companies, including background details, reviews, rankings, etc. Leveraging personal networks by seeking advice from experienced individuals is also invaluable.
Umbrella Company Cost
When considering the costs and fees associated with an umbrella company, it’s crucial to understand the pricing structures they typically employ. These can broadly be categorized into two main types:
Fixed Fee: Under this structure, you pay consistently, predetermined weekly or monthly, for utilizing the umbrella company’s services.
Percentage Fee: In this scenario, the umbrella company charges a percentage of your total invoice value as their fee.
A word of caution regarding percentage fees: opting for this model could lead to significant expenses if you secure higher-paying contracts. It’s important to note that the amount of work the umbrella company performs remains constant, whether your contract value is £1,000 or £100,000.
It is also important for all contractors seeking to work through an umbrella to ask for a full cost breakdown to avoid hidden fees.
Average Cost of an Umbrella Company
The umbrella market is competitive, and the cost of using an umbrella company typically falls within the range of £20 to £30 per week or £80 to £120 per month. Remember that pricing can vary based on the specific company and the range of services they offer. Some companies may offer discounted margins if they have strong relationships with agencies.
The Best Umbrella Companies in 2024
When choosing an umbrella company, business professionals should consider factors such as tax compliance, payment processing efficiency, fees, industry experience, and adherence to regulations. Avoid companies that make dubious claims or employ deceptive practices.
The top 4 umbrella companies for 2024 are:
Caroola has been serving contractors, freelancers, and small businesses since 1992. They offer accountancy, tax, and payroll solutions, particularly for self-employed or working under temporary contracts. Caroola is the only national specialist firm with offices across the UK, and they hold significant accreditations with FCSA, AAT, and ACCA.
- Swapp Agency
As well as managing contractor payment and compliance, Swapp Agency can support your company with Employer of Record services for any ongoing or permanent employees.
- Access Financial
Access Financial provide full umbrella company, payroll and EOR support both in the UK and in 60 countries internationally. Access works with contractors, companies, and directly with recruitment agencies.
Churchill Knight Umbrella
Churchill Knight is a leading PAYE umbrella company accredited by the FCSA. Since its launch in 2016, it has become popular in the UK, helping thousands of contractors and freelancers get paid monthly. Clients can access “My Digital,” an innovative umbrella software for managing work hours and viewing payslips.
Umbrella Companies — Choose the Right One for You
Umbrella companies offer a practical solution for contractors seeking to streamline administrative tasks and focus on their actual work.
Business professionals must conduct thorough research, understand pricing structures (fixed weekly, monthly fee, or percentage), and choose reputable umbrella companies to ensure a smooth contracting experience.
It is a mechanism for paying independent professionals/contractors in the UK, so they do not have to set up their own limited company. By paying an umbrella company, a professional services firm deals with all employment's administrative and compliance aspects.
An umbrella company arrangement is similar, but distinct from, a PEO solution. In a Professional Employer Organization (PEO) solution the worker usually works on an ongoing or permanent basis for a client company, with the PEO taking on co-employment responsibilities.
By contrast, in an umbrella company solution, the individual usually works for multiple clients on a short-term basis, with the umbrella company ensuring that payroll is taken care of.
As with a PEO, umbrella companies and Employers of Record (EOR) are similar, but distinct. Umbrella company employees are usually only assigned to client companies on temporary basis, whereas EOR employees usually have an ongoing relationship with the EOR company.