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Umbrella Company – What Is It And How Does It Work?

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Contractors are often confused about their working structure. They require external support in terms of reducing their administrative burdens. And that’s exactly why the concept of an umbrella company comes into the picture. To put it simply, an umbrella company employs various contractors on short-term assignments and shares their administrative burdens.

This article will include a comprehensive discussion of umbrella companies, their working pattern, their respective expenses, and many other relevant concepts. So, without further ado, let’s get started!

What is an Umbrella Company?

An umbrella company works with multiple contractors and assigns them on temporary projects. Once you complete your registration process, you’ll become an employee of the umbrella company. The umbrella company itself will send an invoice to your recruitment agency with respect to the agreed rate.

The umbrella company also takes care of factors like tax deductions, insurance deductions, etc. that are applicable to your earnings. That means, despite working as a contractor, you don’t have to worry about administrative difficulties. The umbrella company will cover you.

How does an Umbrella Company Work?

Here’re the steps an umbrella company follows while collaborating with an independent contractor:

  • In the very first step, an umbrella company signs a contract with the recruitment agency.
  • Once that’s done, you’ll have to sign a contract with the umbrella company.
  • Next, you need to complete your assignment and get your timesheet assigned by your manager.
  • Afterward, the umbrella company will share your invoice with the recruitment agency. It will subsequently reach the end-user who will complete the payment.
  • The umbrella company will receive their payment at first and will clear your payment afterward through the umbrella payroll system.
  • There are some deductions that the umbrella company will incorporate from your salary. These include tax, pre-agreed fee, pension contributions, insurance, etc. It is not necessary that all these deductions will be part of your salary. Whatever is applicable and pre-agreed will be deducted.
  • The umbrella company will send you a payslip mentioning all the deductions and your final payout.

Why do Contractors Use Umbrella Companies?

Now you may wonder why working with an umbrella company even matters! Well, there are benefits of working through an umbrella company. Here are some of the essential benefits of getting associated with an umbrella company:

  • Collaborating with an umbrella company minimizes your efforts. It saves you time and ensures that you avoid all the unnecessary hassles of running a limited company.
  • Administration and financial activities are often challenging for businesses. These include using financial software, filing VAT returns, Umbrella payroll management, company accounts management, etc. An umbrella company takes care of all these and lets you focus on more meaningful activities.
  • Also, let’s face it. Setting up a company involves a lot of investment. Individual contractors can hardly afford it. Hence, working with an umbrella company seems a much more feasible option.

What are the Expenses Involved?

Let’s discuss expenses now. In fact, don’t ever worry about the expenses. Whatever legitimate business expenses are involved, you’ll get a reimbursement for the same from your client. In some cases, the recruitment agency may also be responsible for reimbursing your expenses as per the agreement. These expenses are popularly called “chargeable expenses”.

As a contractor, there can be several types of business expenses that you come across. You can reclaim all of those from the client. However, in that case, there is a particular working arrangement that you need to avoid. This particular arrangement is known as – Supervision, Direction, and Control (SDC). Under the SDC working situation, you can’t ask for reimbursements.

Alternatively, if your employment agreement doesn’t fall under the SDC category, you’ll get all chargeable expenses reimbursed. Make sure that you claim those at the end of the tax year.

How can You Find Reviews or Compare Different Schemes?

Are you starting your very first contract? It is very likely that you came across the opportunity through a recruitment agency. Recruitment agencies always encourage contractors to join their supplier schemes. Largely because they have collaborated with large umbrella companies.

While this is certainly a good opportunity, we always recommend you explore your options. Before signing a contract with a specific umbrella company, make sure that you have a comprehensive idea of the industry as a whole. That will require you to research a bit. Sometimes recruitment agencies are biased towards a particular umbrella company. As a freelancer, you deserve to work with the best umbrella company for freelancers. Don’t settle for anything less.

Here are a few tricks to compare various umbrella companies:

  • Search online. Majorities of contract and umbrella company-related information are all there. Just a little bit of searching and sorting, and you’re done! You’ll easily find the most compatible umbrella company for yourself.
  • There are some contractor comparison sites too. You can browse these sites to find out more about the umbrella companies, their background, reviews, rankings, and so on. That way, decision-making will become much easier for you.
  • Finally, do you know anyone who has worked with umbrella companies before? That’s the best way to get honest feedback on these companies. You can ask your questions and get all the essential inputs you require to evaluate the umbrella companies.

How Much Does a Typical Umbrella Company Charge?

Wondering about umbrella company fees? Well, there is no hard-written rule for that. However, typically, umbrella companies can charge between £12 to £25 per week. Sometimes contractor umbrella companies also charge a monthly basis. The payment terms depend on your contract.

How can you Select a Good Umbrella Company?

Are you looking for a good umbrella company? There are certain questions that you need to ask yourself:

  • Is the selected umbrella company tax compliant?
  • How fast do they transfer the contractor’s payment after receiving it from the recruitment agency?
  • What is the fee of the umbrella company?
  • Is the umbrella company having significant experience in the industry?

Remember that you need proper answers to all these questions before you can make your final selection. Also, in your search for an umbrella company, make sure to avoid companies that expect the following aspects:

  • An umbrella company that claims to find contract loopholes
  • A company that onboards with low fees but increases the fees soon after
  • An umbrella company that claims their strategies to be HRMC approved

All these are clear red flags. Don’t ever fall prey to any of these deceiving terms from umbrella companies.

What are the Differences between an Umbrella Company and Employer Record?

While we’re discussing Umbrella companies and umbrella payroll, we should also mention a safer option for employers here – Employer of Record(EoR). You can use an EoR to expedite global hiring by staying compliant and issuing the local contracts.

Here are a few differences between Employer Record and an Umbrella Company that you must know:

  • An umbrella company may not always follow all regulations and compliances. It is a riskier option compared to Employer Record. Employer Record is far more compliant and aligned with the global infrastructure.
  • Under Employer of Record, legal assistance is in-house whereas an umbrella company outsources legal assistance. Hence, under an umbrella company arrangement, there are multiple points of communication that make things difficult.
  • An Employer of Record follows a flexible, world-class set-up to manage employment contracts and IP documents. On the contrary, an umbrella company follows a weaker arrangement of IP documents, risking confidential information.
  • An Employer Record is fully GDPR compliant. Umbrella companies also claim to be GDPR compliant but there are no ways to verify this claim.

Still Confused? Get the Multiplier Advantage

Multiplier is an employer of record services that can assist individual contractors and freelancers with the following:

  • Onboarding national and international employees painlessly
  • Generate umbrella contracts promptly
  • Make global payroll services for contractors smoother and faster
  • Take care of administrative aspects like insurance, benefits, and tax!

Collaboration with Multiplier can ease your journey with an umbrella company to a large extent. Want to explore further? Book a free demo now!

Hiring and onboarding using Multiplier ensures you hire remote talent with locally compliant, fool-proof job contracts, offer emphatic benefits and disburse salaries accurately with absolutely nil errors in payrolls.

Hiring and onboarding using Multiplier ensures you hire remote talent with locally compliant, fool-proof job contracts, offer emphatic benefits and disburse salaries accurately with absolutely nil errors in payrolls.​

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