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An umbrella company is a company that employs individuals who work on fixed term temporary contract assignments as an alternative solution to them setting up their own limited company. The umbrella company will employ the individual under an overarching employment contract which enables the individual to work through any number of recruitment agencies or end clients to secure assignments.

In a word – convenience. Working through an umbrella company will be quick to set up (providing you supply the paperwork provided to prove you can legitimately work in the UK) and generally requires less administration, responsibility and cost when compared to having your own limited company. All administration surrounding the mechanics of you getting paid is undertaken by the umbrella company. There are also the benefits of being employed and receiving statutory payments if you can’t work as well as opting in to a workplace pension to save for your retirement.

Once you have been onboarded and are working on your assignment, the umbrella company needs to know the hours you have worked and your rate. The umbrella company will receive this information either directly from you or from your recruitment agency. An invoice will then be raised from the hours supplied and sent over to your recruitment agency, or if you are working directly for an end client it will be sent to them. Funds will be received by the umbrella company from the recruitment agency or end client, which correspond to the invoice that has been sent. The umbrella company identifies the funds against the invoice and then runs the payment through the PAYE system. Tax is calculated and a RTI is issued and the outstanding funds are paid to the employee/contractor. RTI is the system that the umbrella uses to notify HMRC of the tax calculated on your payment.