Umbrella Companies – How Do They Work And Who Do They Benefit?

As the Off Payroll Private Sector IR35 reform looms, many individuals, agencies and businesses are seeking alternative pay options to minimise risk and disruption post April 2020.

Umbrella companies are a popular option. By absorbing responsibilities traditionally left in the hands of the contractor, agency or end client, they’re a straightforward way to meet the proposed changes and maintain business as usual.

Unfamiliar with this way of working? Think it could be an option for you? We’ve provided a breakdown of what an umbrella company does and who they benefit.

What is an umbrella company?

Umbrella companies are payroll service providers that calculate and deduct the correct levels of PAYE and NIC contributions in line with HMRC rules on behalf of contractors and their clients.

An umbrella company employs the contractor freelancer, providing them with full statutory employment rights and benefits – in the same way as a full-time employee would have. The umbrella provider agrees and signs a Contract for Services with the agency; the contractor then signs a Contract of Employment with the umbrella provider.

The way they work is fairly simple. Contractors file a timesheet to their umbrella company, which in turn invoices the agency or business. Once paid, the umbrella business handles all payroll responsibilities and provides a salary to the contractor – taking deductions at source and paying these directly to HMRC. There is opportunity to claim tax relief on genuine business expenses via a year end Self Assessment; your umbrella provider (employer) can help with this.

How is that different from a PSC?

Contractors operating through PSCs invoice the agency or end client directly. At the moment they are obliged by law (Intermediaries Legislation 2000) to determine their employment status, pay the appropriate tax and NICs (if any), and are held liable if HMRC deems them to be employees in all but name.

From 6th April 2020, businesses will have to determine whether they are inside or outside IR35, and the agency will need to double-check it’s right, or chance footing the bill should HMRC challenge the determination.

Umbrella companies, on the other hand, don’t have this problem. There’s no grey areas – contractors are employed by the umbrella provider, who handles PAYE and dealings with HMRC, taking the responsibility and liability away from all parties.

What are the benefits of umbrella companies?

In short, it’s hassle-free. No-one has to worry about getting on the wrong side of the taxman, everyone is clear where they stand, and the umbrella company does all the legwork so you don’t have to.

For agencies and businesses, it’s a convenient way to achieve compliance and peace of mind. But umbrella companies are more than a box ticking exercise; partner with the right provider, and you stand to gain a competitive edge post April 2020.

As modern and compliant umbrella companies offer contractors benefits usually reserved for employees, such as access to a workplace pension, sick pay or employee wellbeing benefits, businesses and agencies can use these as a way to attract and retain top talent.

These benefits, along with employment rights, support and advice and greater job security, make umbrella companies increasingly attractive to contractors. By working together to prepare for 6th April 2020, and beyond, all parties can achieve a satisfactory outcome.

How we can help

If you’re looking at alternative pay options ahead of the incoming Off Payroll Reform, Workr are here to help. With expert knowledge and a range of comprehensive resources, we can guide you through the process, or support you through our own umbrella service.

Our dedicated Workr Compliance team protect businesses, agencies and contractors from the negative impact of IR35 changes, as well as other pitfalls that can harm your earning potential. Worried about how the new rules will impact you? Contact our team on  or fill in the form below.