Umbrella Company Explained
An intermediary that acts as the employer for contractors. The umbrella handles payroll, tax deductions and compliance, while you do the actual work for the end client.
What is Umbrella Company?
An umbrella company is an employment business that hires contractors and pays them through PAYE. The contractor does the work for the end client, but the umbrella is their legal employer. The umbrella invoices the agency or client, deducts its margin (typically £20-30 per week), employer NI, Income Tax, employee NI and any other deductions, then pays the contractor the remaining amount.
How it works
You sign an employment contract with the umbrella. For each assignment, the umbrella raises invoices to the agency or client on your behalf. When payment arrives, the umbrella deducts employer NI (13.8%), its margin, then calculates your gross pay. From that, it deducts Income Tax and employee NI via PAYE, and pays you the net amount. You receive a payslip just like any other employee. At the end of the tax year, you get a P60.
Real example
Kate works through an umbrella at a day rate of £400. Her monthly invoice to the client is £8,000 (20 working days). The umbrella deducts: margin £100, employer NI £890, Income Tax £1,347, employee NI £537. Kate receives approximately £5,126 take-home pay. Through a limited company outside IR35, she might take home closer to £6,200.
Who does this affect?
Contractors who are inside IR35, those who want simplicity over running a limited company, and contractors on short-term assignments where setting up a company is not worthwhile. Umbrella arrangements are also common for temporary agency workers. Always check that the umbrella is compliant and does not use tax avoidance schemes.
HMRC source
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