What is an umbrella company? In an ever-expanding contractor market, concerns over long-term financial commitments, frustration at a lack of holidays or maternity / paternity pay, and a general unease about making ends meet between contracts, will be familiar to most people in self-employment.
For many, the freedom that freelancing affords is countered by the responsibility, not to mention uncertainty, of being self-employed. When selecting a payroll provider, your main options are PAYE (through an agency) or an employment umbrella company.
This is where employment umbrella companies come in, providing the security and reliability of full-time employment. But what exactly is an employment umbrella company, and how do they work?
WATCH: What is an Umbrella Company?In the video below, James Burrows, Managing Director of Danbro Workforce Solutions, discusses the benefits of using an umbrella company. Namely, ‘continuity of employment in a world of short-term contracts.’ Take a look below.
Danbro: What is an Employment Umbrella Company?
Description: James Burrows, Managing Director of Danbro Workforce Solutions, explains what an employment umbrella company is and how it works.
What do Umbrella Companies do?Umbrella companies employ workers who are on fixed term contract assignments. Essentially, they are intermediaries between yourself – a contractor – and your end client or agency. Your agency pays the umbrella company, who then pay you, the contract worker, through PAYE – as if you were a full-time employee.
This means that tax and National Insurance contributions (NICS), for instance, are deducted by the umbrella company on your behalf. It’s a process that serves to simplify your administrative and financial responsibilities. So, you don’t have to worry about filing things like tax returns.
How does Umbrella Employment work?Confused? Don’t worry. Here’s a breakdown of how the process of umbrella employment works in practice:
- Once you’ve selected your umbrella company, they’ll sign an agreement with your recruitment agency or end client.
- A contract of employment is then signed between you, the worker, and the umbrella company.
- You’ll then become an employee of the umbrella company.
- You’re usually required to provide a weekly timesheet detailing your hours of work, as well as any expenses, etc.
- Your umbrella company then invoices your end client (or agency).
- Your umbrella company takes care of deductions such as Tax, NICs and any other deductions required by law, and retains their margin before paying you directly into your bank account.
- Every time you’re paid, you’ll be provided with a payslip and reconciliation sheet, detailing each wage you receive.
“Umbrella companies are the foundation of the temporary workforce market.” James Burrows, Managing Director of Danbro Workforce Solutions.
What are the benefits of Umbrella Employment?Umbrella companies serve to support your contracting career, removing your administrative burden and making sure you’re paid on time, every time. With a good umbrella company, you should get the benefits of permanent employment, while maintaining the flexibility of part-time contracting. These include:
Statutory Employment RightsAs soon as you join an umbrella company, you should be made aware of your statutory employment rights. This includes things like holiday pay, sick pay, and maternity / paternity pay.
HR SupportUmbrella company employees should get access to a professional HR department, providing guidance and support when things aren’t running quite so smoothly. This includes anything from notice or pay disputes, to unfair dismissal.
Continuity of EmploymentAs a contractor or freelancer, you may have multiple end-clients, with contracts running simultaneously. But with an umbrella company, you’ll only ever have one employer and your contract will persist even when looking for a new assignment. As an employee, that continuity of employment will make it much easier to get credit or apply for mortgages.
InsuranceRegardless of your selected provider, you must make sure you’re covered. Certain umbrella companies provide the necessary insurance, as standard, enabling you to carry out your work in a safe and secure manner. Some umbrella companies, though not all, also provide things like health, life and accident insurance, at no extra cost. With Danbro, you’ll automatically be covered by our Public and Employers’ Liability insurance, as well as Professional Indemnity insurance.
DID YOU KNOW? With Danbro’s umbrella employment solution, you’ll only pay a margin when we process your pay. So, you don’t pay a penny if you’re not working.
What is an ‘Overarching Contract’?An overarching contract is a special type of employment contract, which links together a series of separate assignments. Under this agreement, temporary workers effectively become employees of the employment business. This is evidenced by the inclusion of certain provisions, such as constituting a genuine employment relationship.
What happens when my assignment finishes?You’ll be in employment both during and after your assignment. That continuity provides the flexibility of contracting and the stability of full-time employment. It can also help you when applying for a mortgage, for instance.
Danbro work with a national network of recruitment agencies, covering all sectors. If you don’t get paid for five weeks, we’ll get in touch to see how we can help. Likewise, if your assignment comes to a close and you don’t have another one lined up, you can get in touch with your payroll team. You can also check out our jobs board, which lists thousands of new opportunities.
Can I claim expenses as an Umbrella Employee?Back in April 2016, changes were introduced affecting people working under ‘SDC’ (Supervision, Direction, or Control). The changes meant that those individuals could no longer claim certain expenses. In such instances, however, they might still be able to claim allowable expenses. Meanwhile, workers who are not under SDC are eligible to claim mileage expenses. For more information on SDC and expenses, download our FREE guide using the button below.
When you register with Danbro, we’ll ask you to complete our ‘worker questionnaire’. This will determine your eligibility to claim ‘allowable expenses’. These are expenses which, according to HMRC, are “incurred wholly, exclusively and necessarily in the performance of your duties”. If you’re entitled to claim expenses, you can submit your claim through our online portal.
Am I entitled to a Workplace Pension?Yes. A contracted worker, who is an employee of an umbrella company – or professional employment organisation – should get enrolled into a pension scheme when they join the company. This is providing they meet certain criteria.
With our umbrella solution, you’ll have access to the Danbro One pension scheme. Upon joining Danbro, we’ll assess you for eligibility to be automatically enrolled after 12 weeks. You’ll receive more information about this when you register. We’ll also send you more details about the pension scheme. In the meantime, why not take a look at our Umbrella Contractors guide to pensions.
We’ll make sure that you remain informed throughout the whole process. It’s important to note that, although you can opt out of a pension scheme, by law, you’re only allowed to do this once you’ve been assessed as eligible and have been automatically enrolled.
Will I have additional tax to pay?We only deduct the necessary tax on the sums we handle for you. When you register with Danbro, we’ll ask you about other jobs you’ve had and money you earn. We do this to ensure that you’re on the appropriate tax code and are paying the right amount of tax.
You must also declare additional income, or capital gains, to HMRC. Furthermore, if you’ve any queries relating to your tax code, it is your responsibility to raise them with HMRC. To learn more about tax codes we have a helpful video which you can view here.
Employer’s National Insurance: How does it work?All employers are legally obliged to pay Employer’s National Insurance to HMRC. However, it’s often misconstrued that umbrella companies are making illegitimate deductions from pay, when Employer’s NI gets taken from the money they’ve earned.
This is false.
Put simply, Employer’s NI, along with other deductions, must be paid to HMRC by whoever establishes themselves as your employer. Under Danbro’s employment umbrella, you are our employee. Therefore, we bear the cost of employment.
What this means in practice is that the rate you’re paid for your assignment gets uplifted to account for costs such as Employer’s NI, the Apprenticeship Levy and tax, etc. So, the money you take home is the same amount that a permanent employee would earn for the same job. What’s more, all the deductions required by law have been compliantly taken.
Your payslip should clearly outline any deductions, so your take-home pay is completely transparent, with no hidden fees. Hence the importance of selecting a consistent and compliant umbrella provider.
DID YOU KNOW? Danbro have operated in the contractor industry for two decades. In that time, we’ve created close, longstanding relationships with many of the UK’s top recruitment agencies. We process around 200,000 contractor payments every single year.
Umbrella Company Mythbusters!Many people who’ve considered contracting as an alternative to more ‘traditional’ types of work will have heard more than a few misconceptions about umbrella companies. Here are a few of the falsehoods to be aware of:
‘Umbrella companies are liable when it comes to HMRC investigations.’Contractors often overlook the fact that HMRC can choose to investigate any individual’s tax affairs, regardless of their employment arrangement. For example, if business expenses have been fraudulently claimed, the umbrella worker could be liable for any tax or penalties due.
‘Umbrella companies avoid tax!’If you’re using a reputable, FCSA regulated, HMRC compliant provider, there should be no cause for concern in this regard. However, be aware that joining an umbrella company that promises conspicuously high take-home pay could be dangerous. Particularly if they’re involved in something called a ‘contractor loan scheme’. This practice has been deemed as tax avoidance by HMRC.
Remember, it’s you who’s liable if there’s found to be any wrongdoing in relation to your tax. So, if it sounds too good to be true (like ‘keep 90% of your tax’, or, ‘keep 90% of your contracted rate’), it often is.
‘Umbrella employees are subject to IR35.’Intermediaries Legislation, or IR35, is a hugely significant tax law, affecting freelance contractors. Its aim is to prevent individuals who would ordinarily be viewed as an employee, from offering their services through a limited company. This is usually done to avoid paying Income Tax and National Insurance contributions.
IR35 deals with the issue of ‘disguised employment’. So, it impacts those who are falsely positioned as sole traders and limited companies. Umbrella company employees, on the other hand, are generally outside of IR35.
Choosing an Umbrella CompanyIf you’re thinking of joining an umbrella company, or looking to switch to a different provider, there are many considerations to make.
In the UK, there are countless umbrella companies competing for your interest. Choosing the right one is crucial. After all, this is your livelihood and it’s a decision that could have a lasting impact on your financial future. Great umbrella companies should provide rewards, security, and all the benefits of permanent employment. But take heed, the worst companies can cost you time, money and a whole lot more besides.
Danbro’s dedicated team will give you a full consultation to help you find the solution that’s right for you. You’ll also get a sample calculation to give you a better idea of your take-home pay. For more information on how to calculate your take home pay click here. Or, if you’d like a more in-depth calculation tailored to your individual circumstance simply use this form to get in touch.
TOP TIP: Do your research! As with any service provider of this nature, it’s always advisable to check the accreditations of prospective umbrella companies. FCSA, PRISM, CFA and APSCo, for example, are all desirable regulators to receive certification or endorsement from.
What happens if I work for multiple companies / agencies at the same time?At Danbro, we retain one margin per timesheet processed. So, if you’re working on an assignment for more than one agency during the same week / payment cycle, we need to know the details in order to correctly process your payment.
If we process more than one timesheet as part of your payment, we’ll retain one margin for every timesheet processed in that period.