Umbrella companies have grown in popularity in the UK over recent years, for several compelling reasons. Partnering with these companies carries a suite of benefits for agencies and contractors alike, and presents an easy and intuitive way to facilitate smooth payment while reducing the administrative burden on both sides.
In this article, we’ll introduce umbrella companies and explain how they operate, what roles they fill, and the benefits they bring to recruitment agencies and contractors.
After reading you’ll have a firmer understanding of what umbrella companies do, how they work, and why you should consider partnering with one.
For a more in-depth look to umbrella companies, read our comprehensive guide to umbrella companies here.
What is an umbrella company?
In this section, we’ll cover the who, what, where, why, and how of umbrella companies.
First up, the what. An umbrella company is a company that directly employs agency workers for fixed-term contract work. In the context of recruitment agencies, their workers are contractors taking on one or more contracts through the agency.
As legal employers, umbrella companies take on the responsibility for paying their contractors, and for making relevant deductions from their pay through the PAYE system. An umbrella company also takes care of timesheet processing and invoice generation, further reducing the responsibilities placed on the agency and the contractor.
Depending on the nature of the contract, working with an umbrella company can allow contractors to claim back expenses associated with their work. This depends on the terms of the specific contract, and whether the work is considered to be under the SDC (or 'Supervision, Direction, and Control') of the contracting client.
Recruitment agencies often work with umbrella companies as a way to reduce their organisational and administrative burden, along with their liability. A legally binding contract is signed between an agency and an umbrella company clearly defining the responsibilities and obligations on both sides. The partnership can translate to more streamlined internal resources and a stronger focus on core business objectives, and can even remove the need for an in-house payroll team completely.
In short, umbrella companies can be considered a hassle-free way for both contractors and agencies to organise their affairs. An umbrella company has the expertise to reduce the administrative burden on agencies and contractors alike and can advise both sides on the most effective and tax-efficient ways of operating.
Umbrella companies and recruitment agencies
Let’s take a look at the benefits that recruitment agencies can enjoy when partnering with an umbrella company.
Perhaps the most appealing benefit is that the umbrella company becomes the single employer for all of the agency’s contractors. This relationship places all responsibility for payments on the umbrella company, freeing up resources as we mentioned previously.
A partnership also increases the appeal of your recruitment agency to potential contractors. One way this is achieved is through the possibility of continuous employment status - a legal status that broadens a contractor’s options with regard to statutory benefits like sick pay, holiday pay, maternity pay, paternity pay, and more. Continuous employment also makes it easier for a contractor to qualify for loans and mortgages, as they can demonstrate continuous employment status.
This status - and the benefits it affords - offers a financial safety net that is harder for independent contractors to achieve.
Umbrella companies operating in specific industries may also offer perks that appeal to contractors working in said industries. A child safeguarding course offered by an umbrella company for supply teachers, for example
As a recruitment agency, partnering with an umbrella company lets your contractors use their tax code more efficiently. They receive one consolidated paycheck each period, and one P-60 at the end of the year, rather than one for every contracting company they work with.
From a recruitment agency’s perspective, there’s also the reduced organisational burden that partnering with an umbrella company represents. You don’t need to stay abreast of the ever-evolving UK tax law. You’re less likely to attract the curiosity of HMRC if and when your in-house payroll team do overlook something. You may even be able to forgo the need for an in-house team completely, reducing operating costs and making it possible to allocate internal resources more effectively toward the pursuit of your wider business objectives.
Umbrella Companies vs PAYE
If you’re not familiar, PAYE is an HMRC tax scheme that sees deductions of income tax, national insurance, student loan, and other relevant items taken automatically from employees' pay.
Umbrella companies comply with PAYE legislation to ensure that all relevant deductions are made from your contractors’ salaries before they receive payment. This removes your burden of ensuring compliance and processing payment internally and removes their burden of completing self-assessment tax returns.
Contractors are also afforded the peace of mind of knowing that the money they’re paid is theirs to spend as they see fit, rather than having to worry about micro-managing their financial affairs. For a recruitment agency, being able to offer this assurance is a boon to your prospective customers.
If your umbrella company offers pension contributions as part of their service, your contractors can enjoy the additional comfort of knowing that they’re investing in their future financial security every time they get paid.
Umbrella companies represent simplified HMRC processing for recruitment agencies and their contractors alike.
Umbrella Companies vs Limited Companies
When a contractor decides to work on a contract basis, they can do so as a limited company contractor or an individual. Only the latter is eligible to work with an umbrella company.
For a recruitment agency, communicating the benefits of operating as an individual contractor rather than a limited company contractor involves explaining the nature and location of the administrative burden.
For individual contractors, an umbrella agency becomes their legal employer. Their agency pays the umbrella company, which then deducts tax, NI, and other relevant payments before paying their salary. Little admin is involved, and while this is not the most tax-efficient way to operate for all contractors, the tradeoff between convenience and tax-efficiency is usually favourable enough to win them over.
Limited company contractors, on the other hand, are shareholders and directors of their own business, and can draw some of their earnings as a dividend. This reduces their tax burden but increases organisational demands. They must qualify as a genuine contractor within IR35 legislation rather than a ‘disguised employees’, or face the attention of HMRC, which comes with steep costs and the potential of even steeper fines.
In short, umbrella companies offer simplicity and a guarantee of compliance with all relevant legislation to the recruitment agencies they partner with, and to their contractors.
For recruitment agencies, partnering with an umbrella company offers a range of benefits. It reduces your administrative burden, and may even remove the need for in-house payroll teams altogether.
Such partnerships also allow recruitment agencies to distinguish themselves from competitors by offering benefits to their contractors. These perks include statutory benefits like sick pay, maternity pay, and pension contributions, and also include the promise of reduced administrative demands on themselves.
Communicating these benefits to contractors comes down to making them aware of the options available to them, outlining the relative pros and cons, and explaining that your partnership with an umbrella company ensures payment in full, on time, every time.
Are you a recruitment agency looking for umbrella services? Get in touch today and find out how we can help.