Sub banner


What Exactly Is an Umbrella Company?

What Exactly Is an Umbrella Company?

by on October 5, 2022

The Government defines an umbrella company as ‘a company that employs a temporary worker (an agency worker or contractor), often on behalf of an employment agency’. 

With increasing numbers of us now opting to work as contractors, here we take a look at the benefits of engaging with an umbrella company, and ask what reassurances they can offer.


Who uses an umbrella company?

From HGV drivers to Occupational Health Advisors; from Customer Service Advisors to ICT Support Staff; from Rail Construction Specialists to Teachers; freelance and self-employed workers in both the public and private sector are increasingly turning to umbrella companies as a cost-effective and simple means to receive their salaries, as well as manage their tax and National Insurance liabilities. 


How does it work?

If you apply for a job through a recruitment agency, you can join an umbrella company which then becomes your legal employer, rather than you being employed by the company that engages you for the work it requires, or the agency that you found the job through. 

There are certain requirements to using an umbrella company. Firstly, your employment must fall inside the IR35 regulations, and secondly you must be engaged in one or more fixed-term contracts.

However, once these stipulations are met, the umbrella company will handle all your admin and accountancy needs. These include dealing with your timesheets, calculating what PAYE tax, National Insurance and pension contributions that you need to pay, invoicing (either the recruitment agency or the client directly), and ensuring that you get paid. 


What are the benefits of umbrella companies for contractors?

The advantages of umbrella companies are that they allow contractors the freedom to work wherever they choose, with the stability and security of a full-time ‘employer’ providing all the benefits of an employed role, without the restrictions traditionally associated with that type of employment. 

Your umbrella company can be there alongside you throughout your working career, regardless of the company that you complete assignments for. This sense of consistency offers the reassurance of permanence in the transitory world of work that many of us face today.

In addition, building a close relationship with a trusted and compliant partner allows umbrella companies to also offer their contractors the benefits of a record of continuous employment – something which is vital in order to claim employment benefits or to apply for a mortgage. 


How should you select an umbrella company?

The old saying ‘not all umbrella companies are created equal’ should be writ large in your mind when you’re looking for one to partner with. You should choose your umbrella company with the same due diligence as you select other financial products. 

The most important thing to look for is to ensure that they are compliant, meaning that they will abide by the law in respect to your tax and National Insurance contributions, and ensure that you pay your fair share. 

If a company offers a deal that’s too good to be true (minimised tax liabilities and increased take home pay, for example) then it probably is. Both Payme’s umbrella products and processes have been designed to comply with HMRC’s requirements, undergo regular audits to ensure that they comply with tax and employment laws, and are accredited with the Freelancer and Contractor Services Association (FCSA) and Professional Passport, the largest independent assessor of payment intermediary compliance. 

Given the uncertainty surrounding the IR35 reforms that have taken place over the last few weeks, contractors considering a Personal Service Company may be either having second thoughts or even be unable to pursue this avenue. The reassurances that an umbrella company can offer might be more palatable to self-employed contractors as well as more cost-effective, and in the long run, more stable.


Get in touch

More information about Payme’s range of umbrella products can be found here. If you’d like to speak to one of our dedicated customer service team to discover the benefits of partnering with Payme, call us on 0333 200 0845.