Why do I need an umbrella company?

So why do I need an umbrella company? Well the answer is simple – to get paid! You won’t be employed by the recruitment agency or client, so you have to come up with a way to pay your taxes and get money in your bank account.

As a contractor you will have the option to set up and run a Limited Company (or Personal Service Company). Or to work with an intermediary (an umbrella company).

An umbrella company will employ you under an over-arching contract of employment. They will then engage with the recruiter or end client under a business to business contract. This means that they are responsible for sending invoices and receiving payment for the work that you do. Umbrella companies operate PAYE (Pay As You Earn) which means, as with any other UK employer, they have a legal obligation to make payment to HMRC for Employer’s National Insurance contributions. These will be paid from the funds received, in settlement of their invoices, from the recruiter or end client. The umbrella company will also retain a margin from these funds. The balance is your salary and this is subject to deductions for income tax and employee’s national insurance.

So how and when do I get paid?

The umbrella company will normally pay you on the same day as they receive settlement of their invoices. You will receive a payslip detailing your income and deductions in the same way as you do in permanent employment.

However remember as an employee of the umbrella you have the same statutory entitlements, as you do with any other employer e.g. statutory sick pay, maternity pay, paternity pay etc.

Finally as PAYE is all calculated according to allowances and percentages which are laid down by HMRC, your take home pay should be the same whichever umbrella company you chose to work with; the only difference will be the margin they retain and the service that you get!