What is an Umbrella Company?

You may have an upcoming assignment and have been instructed by your agency that you will be getting paid via an Umbrella Company but are unsure exactly what an Umbrella Company is.

New Red Planet, an FCSA accredited payroll provider, will explain what an umbrella company is, how it can benefit you as a contractor, and why you should choose an FCSA Accredited Umbrella for your on-payroll assignments.

In summary, an umbrella company is considered the main alternative to creating your own limited company as a contractor.

The main responsibilities are to supply you with employment status (and related statutory rights) while on assignment and to manage all your tax obligations to HMRC for the work you are doing.

Umbrella companies are becoming more prominent in the contractor marketplace since the changes to IR35 legislation in the Public Sector in 2017 and in the Private Sector in 2021, which saw many contractors moving to on-payroll assignments, the majority of which is via an umbrella company.

How does an umbrella company work?

An umbrella company is an employer of contractors and freelance professionals who complete numerous assignments at various locations for recruitment agencies and/or end hirers. The umbrella company enters into an employment contract with the worker and a service contract with the agency.

This mechanism gives the worker freedom to undertake a series of temporary assignments via a variety of agencies/hirers whilst having continuity of employment with all statutory rights and benefits.

How Your Pay is Calculated

The umbrella company receives assignment income paid by the agency for the work undertaken.

Like any employer, the umbrella must cover employment costs, including the Employer’s National Insurance, holiday pay, the Apprenticeship Levy, and pension contributions.

These employment costs are deducted from the assignment income. Umbrellas also retain a small margin to cover their costs for the services they provide. This is also deducted from the assignment income and the balance is the workers’ gross pay.

What are the benefits of an umbrella company?

There are a variety of advantages involved when it comes to deciding to operate under an umbrella company. These include:

• In certain cases, you may also be able to claim for work-related expenses. This means that these would be free of national insurance and tax deductions. *Remember that if this is something that you can do, you will need to make sure that you keep all your receipts, as these will be needed later in order to make a claim to HM Revenue & Customs.
• You could also be entitled to a company workplace pension scheme.
• It can be an incredibly convenient way to get paid as a freelancer or contractor compared to setting up a limited company, as the umbrella company sorts out the paperwork on your behalf, making the process easy and far less time-consuming for you, enabling you to get on with the work that you need to.
• You won’t need to calculate your own tax. This is because the umbrella company deducts all national insurance and tax contributions from your salary prior to you receiving it, meaning that you have one less thing to think about.
• Umbrella companies can be beneficial to contractors, regardless of their salary rates.
• They can be used by freelancers and contractors on either long or short-term contracts.
• Employment rights, including all statutory rights and benefits such as holiday pay, maternity, paternity, sick leave, pension, etc.
• Employment history and continuity while working on a contingent, multi-location basis (notably to support access to finance, housing/mortgages, etc.).
• Joined-up pay from fragmented working:
• Many workers will perform multiple assignments during a week or a month
• Umbrellas consolidate their worker’s earnings and ensure appropriate taxes are paid
• Peace of mind that tax is paid appropriately, with no need to submit an annual self-assessment return to HMRC.
• Employee/HR support in the unlikely event that an individual needs HR advice, such as a grievance case, as their employer the umbrella company will have processes to support them.
• Ability to claim travel and subsistence expenses subject to status.

About FCSA

FCSA’s primary role is to raise standards and promote compliance and, through accreditation, they encourage self-regulation in the sector in supporting contractors to meet their tax and legal obligations.

FCSA Accredited Members are tested against Codes of Compliance annually and must pass in order to retain their accreditation.

The FCSA’s standards are the most stringent and comprehensive in the industry, as detailed in the Codes of Compliance, which is published and freely available on the website: www.fcsa.org.uk

For more information, or to speak to an FCSA Accredited Umbrella company that will look after all your needs, please do call or email the details below or leave your details using the form below – or call us on 0161 713 1730