An umbrella company employs the contractor who benefits from full employment rights. As an employee the contractor receives full HR support from the umbrella company which includes health and safety at work, employment insurances, the right to national minimum wage, statutory payments and rights, holiday pay, invoicing and timesheet management, payment of tax and national insurance contributions, and statutory HMRC returns and notifications.
An umbrella company processes timesheets received from the employee/contractor, then issues an invoice to the client for payment.
The umbrella company provides payroll services on behalf of the contractor and bills the agency (who in turn bills the client) for work completed by the contractor. The umbrella company provides all PAYE (Pay As You Earn) and National Insurance returns on behalf of the contractor.
The client is effectively the company for whom the contractor works. This may be within any industry and across all levels of employment. The client often elect to use contractors as it affords them the ability to temporarily augment their staff or capability without the burden of the legal requirements associated with permanent employees (PAYE, NI, Sick pay, insurances et al.). Using contractors also facilitates special skills and typically provides the advantage of a broader skill set as the contractor has typically worked with a myriad of companies and organizations during prior contracts.
The agency performs the recruitment process on behalf of the client. Some agencies will provide a PAYE scheme as part of their service. This alleviates the requirement for the umbrella company but requires additional capability within the organisation including professional accountants and adherence to fiscal laws. Most agencies elect to utilize an umbrella company.
The contractor completes the actual work, completes a timesheet and submits this (typically via fax or secure web portal) along with expense claims to the umbrella company.
Expenses and taxes
All umbrella companies use the same PAYE calculations to ascertain how much tax should be paid. The only difference between umbrella companies will be the fee that they charge and the level of service that they offer to their customers.
Some of the most common “allowable” expenses include: Mileage & general travel expenses, hotel and accommodation expenses and Professional Subscriptions. Food and subsistence is rarely allowed to be claimed, as it is the HMRC’s opinion that you would eat regardless as to whether you are working or not. The exception to this rule is if you were staying away from home as part of the work.