How do umbrella companies work?

Trying to understand how an umbrella company works can be confusing. This article will explore what umbrella companies are, their everyday duties and why they are useful.

In this context an umbrella company is a company that acts as an employer to employment agency contractors. It has the responsibility of providing an accurate payroll service. The following process details how an umbrella company pays contractors:

1. An umbrella company and an employment agency sign a business to business contract, then a contract of employment is signed between the umbrella company and individual contractors
2. At the end of their working week, the contractor will create a timesheet, detailing how many hours they’ve worked and then get it signed by their client
3. The contractor will send 2 copies of their timesheet: one to their agency and the other to their umbrella company with additional information concerning any expenses they want to claim
4. Umbrella company invoices the contractor’s agency for the hours worked and any reimbursable expenses (if claimed)
5. The agency then invoices the client
6. The client pays the agency which, in turn, pays the umbrella company
7. Once the payment is received, the umbrella company deducts tax, national insurance contributions and umbrella services margin before paying the contractor through the PAYE system
8. The contractor receives their payment along with a payslip (sent by their umbrella company) detailing how their payment was calculated

Note: Points 2-4 above change slightly when a self-billing agreement is in place – we will cover this in a future article.

Benefits

There are many benefits to registering with an umbrella company, including: