What is an umbrella company?

An umbrella company provides the specialist services of its employees to end-user clients, usually via recruitment agencies, on a short-term assignment basis. The individual is normally referred to as a contractor.

The contractor or umbrella employee normally has specialist skills and experience that are desirable to businesses with project-based work or with a requirement to scale up and down quickly. Whilst umbrella company employees may work on a number of temporary assignments for a range of different clients their employment relationship with the umbrella company is continuous.

Both parties are bound by the terms of the contract for its duration with notice required from either party to terminate the arrangement. By virtue of the contractual arrangement the umbrella company will meet all Statutory Employer obligations and will deduct PAYE taxes from its employees. Employer’s NI will be paid to HMRC with the PAYE deductions from employees and reported to HMRC via RTI.

The umbrella will deduct a margin from the contract value for processing the pay and handling the employment taxes paying the net salary direct into the employees UK bank account.

Umbrella companies came about following the MSC Legislation in 2007. The umbrella employment model gave contractors an alternative to operating through their own Ltd Company, or as an alternative if their contract was deemed to be caught by the IR35 legislation. It was seen as the hassle free option to running a Ltd Company.