How do Umbrella Payroll Companies Work: The Inside Guide - Featured Image

How do Umbrella Payroll Companies Work: The Inside Guide

There’s a lot of confusion around umbrella companies, but these are based in unfamiliarity rather than any inherent complexity. Contracting through an umbrella company is easy, and offers a wide range of benefits.

In this article we’ll explore the relationship between recruitment agencies and umbrella companies, and break down how these companies work in simple language.

After reading you’ll have a firm understanding of how umbrella companies work, and the benefits of using one as a contractor or recruitment agency.

How does an umbrella company work?

Your relationship with an umbrella company will vary depending on whether you’re a recruitment agency or a contractor.

How does an umbrella company work for a recruitment agency?

As a recruitment agency, you make the decision to enter a partnership with an umbrella company. The company then becomes the legal employer of your contractors, and takes on the responsibility for managing their payroll. This includes generation of invoices, all relevant deductions through PAYE, and making payment.

The umbrella company will also create contracts on behalf of the contractors.

We’ve written more about how umbrella companies work for recruitment agencies here.

How does an umbrella company work for a contractor?

As a contractor, your experience with an umbrella company will look something like this -

You'll secure a contracted role, as normal.

The umbrella company will then sign a direct contract with your recruitment agency, where the terms of the role are outlined and agreed upon.

You track your time via time sheets as normal, and have these signed and verified by the relevant supervising staff.

You submit your time sheet to the umbrella agency and the agency with whom you secured the contract, usually a recruitment agency. This ensures mutual visibility of hours completed.

The umbrella company generates an invoice on your behalf and bills your recruitment agency, who then bills the contracting client.

Once the payment has been made down the chain and received by your umbrella agency, they process your payroll.

Your salary is calculated, then relevant deductions are made. These include PAYE deductions for tax, national insurance, student loan, pension contributions and so on, as well as fees charged by the umbrella company for their services. If you are eligible to claim expenses and have done so, these will be factored into the payroll as well.

The umbrella company issues you a payslip outlining your gross pay, all relevant deductions, and your net pay.

This process repeats at agreed intervals for the duration of the contract, ensuring you have full visibility and evidence of payment for the full term.

Here are the answers to some common questions we hear asked by contractors researching umbrella companies -

Do I need an umbrella company?

Working with an umbrella company often equates to reduced administrative obligations and a more streamlined contracting experience. Outsourcing compliance, deductions, and paperwork management to an umbrella company gives you more time to focus on striking the perfect work-life balance.

Does IR35 apply to umbrella companies?

No. IR35 legislation applies to limited company contractors, and such contractors are unable to work with umbrella companies.

A benefit of working with an umbrella company is that they remove the pressure of ensuring IR35 compliance.

Do umbrella companies pay your tax?

Umbrella companies make relevant deductions from your gross pay and these are paid on your behalf through the PAYE scheme. These deductions include income tax, national insurance contributions, student loan repayments, pension contributions, and more.

The pay you receive is your net pay, after all deductions have been made. This means you don’t need to worry about further management of your tax affairs once you’re paid.

What kind of services does an umbrella company offer?

Let’s take a look at the services offered by an umbrella payroll company.

Primarily, umbrella companies offer payroll management for contractors and agencies. They act as the middleman, taking on the burden of admin, paperwork, and payments. This allows agencies and contractors alike to focus on doing their work, while ensuring full compliance with all relevant legislation.

Umbrella companies also offer contractors the opportunity to claim back legitimate business expenses, if the terms of the contract allow for this. This translates to tax relief for contractors, and is a way to increase their earning potential.

At Optimum Pay Group we’re proud to enrol our employees into our Nest pension scheme after three months, too. We believe that working should grant you the opportunity to plan for your future and invest in your ongoing financial security.

We also believe that contracting shouldn’t prevent you from enjoying the perks that full-time employees receive. That’s why we offer statutory holiday, and statutory benefits like sick pay, maternity pay, and paternity pay.

Not all umbrella companies offer the same services or benefits, so make sure you understand what’s on offer before making your decision.

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In Conclusion

Umbrella companies offer many benefits to agencies and contractors alike. We exist as a middleman to take on the administrative burden associated with payroll, and to reduce stress on both sides.

As a recruitment agency you can expect streamlined internal processes and more internal resources to focus on recruitment and growth. As a contractor, you can expect an optimised and efficient work life, with payment on time, in full, every time.

Despite some confusion around the term, umbrella companies are fairly simple. Hopefully this article has strengthened your understanding of the term, the role we play, and the myriad benefits we can deliver, whichever side of the recruiter-contractor coin you’re on.

In need of an umbrella company? Discover how we can help you with your payroll today.


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