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What is an umbrella company?

Ever wondered what umbrella companies are used for? Or what it’s like to work for one? If you’re a freelance contractor, you could find they’re a route to more money and less responsibility. Here’s what to know.

Ever wondered what umbrella companies are used for? Or what it’s like to work for one? If you’re a freelance contractor, you could find they’re a route to more money and less responsibility. Here’s what to know.

Written by
Mubina Pirmohamed
Business and landlord insurance expert
2 MARCH 2021
4 min read
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What’s an umbrella company?

An umbrella company is a firm that employs freelancers on temporary contracts. If you register with an umbrella company, you’ll effectively become an employee of that company. They’ll take care of your tax and national insurance payments for you, before paying you your wages.

How does an umbrella company work?

An umbrella company is basically a middle man between you and a client or, most commonly, an employment agency. When you work for an umbrella company, you’ll invoice them for the work you do. The umbrella company will then invoice the agency, who’ll in turn get that money from the client the work was done for.

Who needs umbrella companies?

If you’re just starting out as a freelancer, umbrella companies can be a great way to get work. They give you a taste of what it’s like to work for yourself, without the full commitment and administrative burdens.

How do umbrella companies make money?

Umbrella companies make their money by charging clients a set fee, then taking a commission after they’ve paid employee wages and taxes.

What are the advantages of using an umbrella company?

If you’re freelance, there can be lots of benefits to using umbrella companies. These include:

  • More stability
    If you’re new to freelancing, working for an umbrella company can mean you get a constant flow of work without having to go out and tout for it.
  • Less paperwork
    If you don’t like admin, working for an umbrella company can be a great option as they’ll take care of all the boring stuff, like invoicing and payroll.
  • Easy insurance cover
    Some umbrella companies will cover you for things like employers liability insurance and public liability insurance, giving you less to think about.
  • You’ll get employee benefits
    As an employee of the umbrella firm, you’ll be entitled to holiday pay. To work out how much holiday pay you’ll get, your umbrella firm will multiply your gross salary by 12.07%. And since you’re technically an employee, you’ll also get perks like redundancy pay and childcare vouchers.
  • Easier to get a mortgage
    If you’ve got a steady flow of regular work, mortgage lenders will look on you more favourably.

What are the disadvantages of using an umbrella company?  

Working for an umbrella company does have its downsides, which you should be aware of. Things like:

  •  You’ll take home less money
    Unsurprisingly, the umbrella company needs to take its cut. That means you’ll take home less money than you would if you worked directly with the client.
  • You could have issues with HMRC
    Some umbrella companies aren’t as scrupulous as they could be when it comes to paying tax. If you’re starting work with an umbrella company, make sure you check they’re the real deal and are paying your tax and NI in full.
  • You’ll have less control over your affairs
    As an employee, you’ll ultimately be answerable to the umbrella company. That means you won’t enjoy all the independence that comes with being your own boss.

If I’m self-employed, can I be paid through an umbrella company?

If you work for an umbrella company, you’re generally considered to be their employee. That has lots of benefits though, as it means they’ll sort out your tax and give you benefits like holiday pay.

What’s the difference between an umbrella company and a limited company?  

When you go self-employed, you have the choice between being a sole trader, a limited company, or working for an umbrella company.

As a limited company, you’ll be a company director. This comes with lots of responsibilities, plus extra paperwork and tax deadlines. But it’ll also give you tax benefits that could see you take home more cash each month.

An umbrella company takes on freelance contractors and treats them as employees, paying them directly. It then takes a cut from their wages to cover tax, NI and commission. You’ll end up with less money than you would with a limited company, but also less admin.

Should I run my business through an umbrella company or a limited company?

This is a personal choice and depends on what you feel is right for you. Running a limited company is generally more work – you’ll have to deal with tax, accounts, VAT returns and so on.  
Working for an umbrella company is a lot less hassle, but won’t give you the freedom you’d get with a limited company. Ultimately, you’ll have to weigh up the pros and cons of each to decide which suits you more at your current stage of the journey. Good luck! 

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