What is an umbrella company? | UmbrellaCompanies.org.uk

In this short video, we answer the commonly asked question – what is an umbrella company? The video transcript is below. For more information, please visit www.umbrellacompanies.org.uk.

To put it simply, umbrella companies process the payroll of temporary workers by becoming their employer. However, the best way to explain how this works is to look at all the processes within the supply chain.
Firstly, let's imagine that a contractor called Dave lands a new temporary assignment through a recruitment agency working for an IT company in London. The company Dave works for doesn't offer payroll to temporary workers, nor does the recruitment agency. Therefore, an umbrella company must be introduced into the supply chain to ensure Dave is paid for his work.

Dave's recruitment agency presents him with a Preferred Supplier List – a list of umbrella companies they recommend he considers joining. Dave does his research and decides that one of the umbrellas on the list is better than the rest. He gives them a call and starts the registration process.

Dave must provide the umbrella company with important personal information as well as information about his contract with the IT company – a legal requirement. This includes his full name, address, contact information, NI number, bank details, and assignment information. He must also provide proof of his identification with a copy of his passport. Because Dave is not a UK national, he is required to provide proof of his Right to Work in the UK with a Settled Status 9 Digit Share Code.

Once this information is provided, he is asked to provide a P45 document. On this occasion, Dave didn't have a P45. This was not a problem because he completed the New Starter Checklist for PAYE, an online government form, instead.

Before officially becoming an umbrella company employee, Dave must sign and return a Contract of Employment. Upon signing and returning this document, Dave becomes an employee of the umbrella company, and he is now set up and ready to receive compliant PAYE payments.

Compliant umbrella companies make the whole payment process easy. Dave is required to go to work as normal for the IT company in London. He must also submit weekly timesheets to both his agency and umbrella company to let them know how many hours he has worked. When it comes to paying Dave, the IT company, which is also referred to as the end-client, will send his funds to the recruitment agency. The recruitment agency will then pass Dave's assignment rate to the umbrella company. Each party within the supply chain signed an over arching contract when Dave registered with the umbrella company. The contract confirmed each parties role within the supply chain stated their payroll obligations within the arrangement to ensure Dave is paid compliantly for the work completed.

The umbrella company, Dave’s employer, received his assignment rate. The employment costs, including the Employer’s National Insurance, Holiday Pay and the Apprenticeship Levy, are deducted from the assignment rate. After these deductions are made, this leaves the gross rate of pay. Compliant umbrella companies process payments in accordance with Pay As You Earn – PAYE. This means they will make legal deductions to Dave’s gross rate of pay, including income tax and Employee’s National Insurance. The umbrella will automatically opt Dave into a pension scheme, which is a legal requirement, and he’s paying back a type one student loan. As a result, these deductions are also made by the umbrella company.

The only income compliant umbrella companies generate for themselves is the margin they deduct when they process the payroll of a temporary worker. You will notice that umbrellas advertise a weekly margin often between £20 and £30. The umbrella Dave has joined has a £20 per week margin, and this will be deducted from Dave's gross rate – meaning he saves on tax.

Once the umbrella is ready to pay Dave, they will send his funds to his personal bank account – as per the pre-arranged payment frequency. They will also issue Dave a payslip outlining the deductions made to his pay.

The process is pretty straightforward. However, umbrella companies do more than process the payroll of temporary workers. By registering with an umbrella, Dave becomes an employee of theirs, and this has plenty of benefits. Firstly, Dave has access to employee rights, including statutory sick pay. The umbrella also provides free insurance up to £25 million, as well as Same Day Faster Payments and an employee reward scheme – allowing Dave to save money when shopping online.

We recommend that temporary contractors like Dave only consider using an umbrella accredited by either the Freelancer and Contractor Services Association, the FCSA, or Professional Passport.

Thank you for watching this short video. For more information about umbrella companies, please visit our YouTube Channel, or head over to www.umbrellacompanies.org.uk.