Working through an umbrella company

Many contractors have turned to umbrella companies as a hassle-free way of providing their services to clients now that the stricter off-payroll working rules apply for most contracts.

There are no genuine tax savings, but the use of an umbrella company will mean less administration and should be cheaper compared with maintaining a standalone personal service company.

How umbrella companies work

Finding a client will still be down to you, whether you do this directly or via an employment agency.

  • You, as the contractor, will have an employment contract with the umbrella company and will therefore be an employee and subject to PAYE. This means the off-payroll working rules do not apply.
  • The umbrella company is paid by the client or the employment agency.
  • Your gross pay from the umbrella company is calculated after various costs, such as the umbrella company’s administration costs, employer NICs, workplace pension contributions and holiday pay.
  • The salary paid to you will have PAYE and employee NICs deducted.

Holiday pay

As an employee of the umbrella company, you will be entitled to 5.6 weeks of paid holiday a year, and you should be paid this benefit if you leave with any accrued holiday entitlement.
However, holiday pay must normally be taken in the year it is accrued and cannot be carried forward. This is one area where an unscrupulous umbrella company can cost you, with some simply pocketing pay for unclaimed holidays.

Tax avoidance

Most umbrella companies are compliant with tax rules, but be wary of any that claim they can help you keep more of your earnings than others, or ask you to sign an annuity, loan or other agreement involving a non-taxable element of pay; especially if this involves a different organisation to the umbrella company.