Ultimate Guide to Umbrella Companies

Chris Andreou

June 3, 2021

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Contractors

What is an umbrella company?

An umbrella company is an organisation that employs contractors working on fixed-term contracts. It acts as an intermediary between the contractor and their end client or recruitment agency. 

Accountancy, administration and taxation matters are handled by an umbrella company provider. As such, when you work through an umbrella company, you won’t need to take on the responsibilities that come with running a limited company.

Your provider will also manage the payroll. They will collect the payment for the work you’ve completed from the end client or your recruitment agency. You’ll then be paid through PAYE, with your taxes, National Insurance contributions and pension payments being deducted at source.

What’s the process of working with an umbrella company?

1. Register with an umbrella company

The process of registering with an umbrella company is fairly simple. 

After you’ve made a comparison between different providers (we’ll share our tips for doing this in the following sections), you’ll need to get in touch with your chosen umbrella company provider. Most companies will be able to complete your account set up within 24 hours.

2. Signing a contract

After you’ve reviewed the terms and conditions and signed the contract, you’ll need to inform your agency or clients. They’ll then prepare contracts using the name of the umbrella company as the contractor. 

3. Starting an assignment

When you start on a new assignment with a client, you’ll need to inform your umbrella company provider about the relevant project details, such as your rates and the start and end dates. 

You’ll also pass your timesheets to your umbrella company and recruitment agency (if you have one), and your umbrella company will handle your payroll and administrative matters. You’ll then receive a payslip that indicates your take-home pay and the deductions made.

Umbrella company: Advantages and disadvantages

The advantages to working through an umbrella company are:

  • It’s quicker and easier to join an umbrella company, compared to setting up your own limited company. 
  • You’ll deal with less administrative work, as the umbrella company handles invoicing, payment, taxation and other paperwork. 
  • You’re considered an employee of the umbrella company, and are entitled to sick pay, holiday pay, maternity/ paternity pay and other statutory benefits
  • It can be a great option for short term contractors, as they won’t have to go through the hassle of setting up a limited company and making the arrangements for it to be dissolved. 
  • It offers an option for contractors who are undecided about becoming self-employed to test things out, before they begin contracting for the long term. 

The downsides to working through an umbrella company include:

  • You’ll have less control. When you’re running a limited company, you’ll have full control over all aspects of your business—including how and when you get paid, taxation and your business finances. 
  • You may find it more tax efficient to operate through a limited company. You’ll receive all your income in the form of a salary; tax, NICs and the umbrella company fees are deducted from your earnings. 
  • There are a number of unlawful umbrella companies operating illegal arrangements like tax avoidance schemes. It’s critical that you research into prospective umbrella companies thoroughly before you sign a contract.

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Understanding umbrella company fees

Umbrella companies typically charge a fixed fee or percentage fee. 

Fixed fees

As the name suggests, a fixed fee structure refers to a flat fee that you need to pay your umbrella company for using their services.

The amount won’t vary regardless of your income. If your umbrella company charges a monthly fixed fee of £100, that’s what you’ll pay—even if your income fluctuates from month to month. 

Percentage fees

Percentage fees are calculated based on your earnings.

If your umbrella company imposes a percentage fee of 5%, you’ll pay a fee of £250 if your monthly earnings amount to £5,000. If your earnings drop to £3,000 the following month, you’ll then pay a fee of £150. 

The percentage fee structure is the less popular option of the two. That’s because a contractor could wind up paying a sizable sum as a high earner—unless a cap is imposed on the total amount of fees charged. 

Additionally, given that the administrative tasks that an umbrella company undertakes remains relatively similar regardless of the amount of work a contractor takes on, it can be difficult to justify charging a significantly higher fee on the basis that a contractor's earnings has increased.

Choosing an umbrella company

There are various factors of consideration for choosing an umbrella company: 

  • Fees
  • Quality of service
  • Speed 
  • Industry reputation and testimonials
  • Experience and qualifications

We’ll explore these factors in greater detail below, and share questions that can help you evaluate prospective umbrella company providers.

1. Fees   

A reputable company should clearly communicate their fees and costs before you enter into a contract. 

However, there are providers that attempt to impose additional charges by breaking down their services—so you wind up paying more for “add-on services”. The following are red flags you need to watch out for: 

  • Registration fee: This is a fee imposed for joining an umbrella company
  • Exit fee: A fee imposed that is charged when you leave the umbrella company. 
  • Administrative fees: These fees are imposed on performing administrative tasks, such as processing your expenses or generating HMRC forms you need to submit. 

Bear in mind that you shouldn’t have to pay the above mentioned fees, so you’ll want to reconsider your options if a prospective provider imposes these charges.  

Questions to ask:

  • What are the fees?
  • Are the fees fully inclusive, or are there additional charges for extra or add-on services? 
  • Will I have to pay a fee when I register or leave?
  • Is the umbrella company fee applied to my net or gross earnings?
  • Will the umbrella company fee apply regardless of my working status? 
  • If a service is advertised as free, how does the umbrella company support this? Is the free service only available temporarily? 
  • Is there an introductory offer?

2. Quality of service

Ask any experienced contractor, and you’ll be told that paying a higher fee to a provider is worthwhile for a positive customer service experience. 

You don’t want to be faced with a customer support team that is slow to respond, or reach out to a provider that’s unable to provide the guidance or information you need. 

Questions to ask:

  • Will I be assigned a client manager? Is he or she a qualified accountant? Will I be given their direct contact details? 
  • Will I have access to a HR department, should workplace issues or conflicts with an end client arise? 
  • Do you offer unlimited face-to-face meetings and contract reviews? Are these included in the fee? 
  • Is telephone support included?

3. Speed 

It’s important to consider the provider’s speed of processing transactions and payments. 

You don’t want to be left waiting for payment, so you’ll want to get clarification early on on how efficiently invoices are managed, and how soon you can expect to be paid.  

Questions to ask:

  • How long will it take for me to receive my payment after submitting my timesheet?
  • Do you process same-day payments? Is there a fee charged for this? 
  • What’s your process for chasing unpaid invoices?
  • Am I able to track my pay, and manage other administrative tasks (such as submitting timesheets) through an online platform? 
  • If you’re unable to obtain payment from the end client, will I still get paid?

4. Industry reputation and testimonials

Start off with your personal contacts. Tap into your personal network for recommendations, and seek out suggestions from contractors from professional networking groups. 

When it comes to online testimonials, fake reviews are more common than you think—and it can be difficult telling cleverly placed fake testimonials from authentic ones. 

You’ll need to review online testimonials with a critical eye. It’s best to check reviews from across a diverse range of sources, rather than just looking through consumer review sites. It also helps to review online forums, and read up on the personal experiences shared by other independent contractors.

Keep an eye out for the dates the reviews are posted on; a series of reviews posted within days of each other are an indicator that it’s part of a calculated move. 

Compare the reviews against media coverage; do a quick search on Google to check if a prospective provider has been featured on a reputable website or resource. 

And while one-off negative reviews aren’t a deal breaker, you’ll want to pay close attention and dig deeper if a provider has received multiple reviews that focus on similar pain points. 

Questions to ask:

  • How long have you been trading?
  • What other contractor services do you offer?
  • How many contractor clients do you currently have? Am I able to review testimonials from these clients?

5. Experience and qualifications

Seeking out providers with a proven track record is important—but keep in mind that how long an umbrella company has been in operation isn’t necessarily an indicator that it’s a trusted provider. 

A fairly new company can be a competent contender to established businesses that have failed to keep ahead of evolving trends and technological changes. 

One of the key things to check for is whether the provider has been accredited by professional bodies like FCSA and Professional Passport. This ensures that the provider has been proven to be compliant with HMRC rules and regulations

You may want to ask your prospective provider to provide more information about their estimated response times or onboarding and work processes. This offers insight into their operations, and can help you better assess how efficient their operations are. 

Questions to ask: 

  • How long have you been providing services to contractors?
  • What are other contractor services you provide?
  • What accreditations do you have? 
  • Do you offer a service guarantee? 

Professional bodies:

There are a number of professional bodies and trade associations the UK, including:

Other questions you should ask

  • How often will I be paid? You'll need to check in about your pay frequency. Providers typically make weekly or monthly payments, but you may be offered the option of receiving fortnightly payments, or be paid at another frequency.
  • How will I be paid? Get clear on the details of your payment process. A good provider should make it easy for timesheets to be submitted and approved, such as accepting online submissions and offering a streamlined approval process.
  • Is there a pension scheme in place? As an employer, your provider should provide you with access to a workplace pension scheme. You should be automatically enrolled if are between 22 years old and the current State Pension age, earning more than £10,000 per annum and haven't been enrolled in another workplace pension scheme. You should be notified about your provider's workplace pension scheme within six weeks of starting a new assignment.
  • What are the types of insurance cover provided? As an employer, it is a legal requirement for your provider to have employer's liability insurance. They should also hold professional indemnity and public liability insurance. Certain providers may also offer personal accident cover.

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An umbrella company is an organisation that employs contractors working on fixed-term contracts. It acts as an intermediary between the contractor and their end client or recruitment agency.

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