If you are new to contracting, have never used an umbrella company before, or are a director of a limited company, the workings of umbrella payroll may seem confusing.
Working through an umbrella company is by far the easiest way to operate as a contractor. Unlike working through a limited company, there is very little ongoing administration as the umbrella company will take care of most of this for you.
Continue reading as our blog answers one of the most commonly asked questions in the self-employed industry: “How do umbrella companies work?”
What is an umbrella company?
An umbrella company is a PAYE payroll company which contractors and freelancers can use as an alternative to setting up a limited company.
When you register with an umbrella company, you become their employee, and they will deal with the majority of the administrative and the tasks associated with getting you paid.
For example, they will invoice your client or agency for the work you have completed, process your PAYE tax and National Insurance Contributions (NICs) and pay them to HMRC on your behalf.
There is plenty of information available online about what an umbrella company is and it is well worth taking a look if you are considering using one.
How do umbrella companies work?
After comparing different umbrella companies, you have chosen a provider that ticks all the boxes. And, you’re probably now wondering – how do umbrella companies work after you’ve registered?
Once you’ve registered there are only a few simple steps you will need to complete to ensure you are ready for your first payment. Don’t worry; these shouldn’t take more than 10 minutes!
For an umbrella company to be able to pay you, they will require proof of identity, a copy of your work permit or visa (if applicable) and your P45. The process for submitting these documents will vary between providers, but you will most likely be required to submit them via an online form or email.
What happens if I don’t have a P45? If you do not have a recent P45, the umbrella company will ask you to complete a Starter Checklist for PAYE which will provide them with the required information.
The umbrella company will also send you a contract of employment which you will need to read carefully before returning a signed copy.
You have now completed the on-boarding process and are ready to get paid. Depending on your payment schedule, you will need to submit a signed timesheet each week/month to ensure the umbrella company can pay you on time.
Your umbrella company will process your payroll, making deductions for:
- Margin
- Tax
- Employee’s NICs
- Employment costs (Employer’s NICs and the Apprenticeship Levy)
- Student Loan (if applicable)
- Pension contributions (if you decide you want to remain with the umbrellas pension scheme after the first 12 weeks).
You will then be paid. For each payment, you will also be issued with a payslip which will include a breakdown of your tax deductions.
So, how do umbrella companies work? You should now be able to answer this question confidently. However, if you are still unsure, there is lots of useful information available for readers about how umbrella companies work, and our umbrella company FAQs are sure to help.
How do umbrella companies work when you are registered with a recruitment agency?
Once you register with your chosen umbrella company, they will contact your recruitment agency and let them know you have signed up to the service. Your agency, the umbrella and your end client will then enter into an overarching agreement and will exchange assignment details.
You may also be required to submit a signed timesheet to your agency as well as the umbrella company for the work you have completed.
Once the umbrella company has received your timesheet, they will raise an invoice with your recruitment agency who will then raise an invoice with the end client. Once your agency receives funds for the work completed, they will send this to the umbrella company to process payment.
How do umbrella companies work if you are working directly for an end client?
The process is very similar! Once you register, the umbrella company will reach out to your end client and will exchange contracts and assignment details.
You will then send your signed timesheet to the umbrella company who will raise an invoice directly with the end client. Your end client will send the funds directly to the umbrella company who will then process your payment.
Are you interested in registering with an umbrella company?
Using an umbrella company is the easiest way to get paid as a contractor or freelancer. However, with so many providers on the market, it’s essential you only use compliant umbrella companies for your payroll.
Start your search with our top 10 umbrella companies and find a provider that is right for your circumstances.
