Fundamentals

An Umbrella Company will employ you in a similar way to any other employer. You will be a permanent employee engaged to work on a number of assignments. You will be provided with a Contract of Employment under the Employment Rights Act 1996 granting you full employment rights.

The Umbrella Company contracts with your client or agency and takes care of all the administration matters.

Umbrella services are used by many contractors because they provide a simple, cost effective and flexible operating structure.

The contractor becomes an employee of the umbrella under a contract of employment. The contractor enjoys the benefits of employment but still retains the flexibility of contracting. The umbrella contracts with the recruitment agency, or directly with the end client (if no recruitment agency is involved). All income is paid out through the PAYE tax system. Contractors working through an umbrella will usually submit their timesheets to the umbrella.

The umbrella will then raise an invoice based on the agreed rate and submit this to the agency or end client for payment. Timesheets must usually be submitted within a set time frame to ensure prompt payment to the contractor. Usually any claims for any allowable expenses the contractor has incurred are submitted with the time sheet. The ability to claim expenses is one of the main advantages for the contractor working through an umbrella as opposed to directly through the recruitment agency. However with new rules introduced since 6 April 2016 the ability for certain contractors to claim travel and subsistence expenses is now restricted.

The contractor is also usually offered a higher rate much like a contractor engaged through their own limited company. This is because the rate should reflect that employers Nl, holiday pay and statutory benefits have been passed on to the umbrella business.

The umbrella will take care of all the administration, tax and payroll work for the contractor and provide insurances within the fees of the service to cover the contractor working on an assignment.

Important points to consider:

• You will be taxed on the PAYE basis.
• Your total income will be subject to earned levels of income tax and National Insurance Contributions.
• Your rights as an employee, depending on the contract with the Umbrella might include:
  • Sick pay
  • Holiday pay
  • Redundancy rights
  • Unfair dismissal rights
  • Age/sex discrimination rights
  • Grievance rights
  • Rest breaks
  • Maternity/paternity/adoption pay and leave
  • Pension provision
  • Health and safety legislation adhered to by your employer
  • A written contract of your rights and obligations setting out the terms under which you have both entered into the employment relationship.