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What is an Umbrella Company and How Do They Work?

 An umbrella company acts like a bridge between an agency that recruits people (the client) and a contractor or any individual (self-employed). 


Umbrella Company

An umbrella company is a perfect intermediary that makes the system of payments roll along smoothly. They make life much easier for contractors and their careers too. They take care of the administrative side and ensure timely payment for you without fail. An efficient umbrella company can give you two benefits packed into one package. You enjoy all the conveniences of your permanent job (or other sorts of employment), but you can also take advantage of the flexibility and the freedom freelancing offers.

These umbrella companies look after the employment of workers, too, as they hire them on predetermined contracts or based upon assignments. They rest easy in the middle spot and send invoices to the agency on the contractor’s behalf. Then when the agency sends the payment to the umbrella company, they redirect that after deducting PAYE (income tax, insurance, etc.). So you get your payment just like a full-time employee does, only without ever being one, without worrying about other things like filing taxes

So, an umbrella company simply works like a professional organizer for independent freelancers, providing them timely payments and peace of mind. It lets them focus on their work much better, so they can utilize their time for numerous short-term assignments and enhance their incomes to their fullest potential.

Their process is fairly straightforward. Here’s a step-by-step description of how they work:

●Signing contracts: 

Before signing up contracts, you should look into your options for umbrella companies. You should look at their fees and their ratings. Also, keep in mind that as a part of an umbrella company, they are contractually obligated to provide basic employment rights like sick leave pay, paid maternity, or paternity leaves. You should also check which umbrella companies offer the best of the lot in terms of rights. 

Another important thing to look for is the insurance/s they’re providing. And even if they’re not, always ensure you’re well covered. Most umbrella companies offer all the necessary insurances as a standard practice. It provides a huge safety net. And a few even give the most significant insurances like life, health, accident, etc., completely free of cost. In particular cases, they even offer professional indemnity insurance. 

Only after checking all of this should you sign the contract. And then, they’ll sign the contract/s with the agency. And if the supply chain proposes an end client, then they’ll make the contract with them. And the contractor or freelancer only needs to sign the employment contract with the umbrella company of their choice. With that, they’ll become an employee in the umbrella company.

● Submitting timesheets: 

As a working freelancer in any limited company, they have to make and send invoices to clients or the agency. Similarly, after becoming an umbrella company employee, it’s imperative to submit weekly or monthly timesheets to the company itself. The timesheet is a sort of register that details their work life. It contains details of the total hours worked and all the expenses that can be claimed. According to this data, the umbrella companies send bills to the agencies or clients for your work. 

● Getting payments: 

After the agency pays back all your work hours, the umbrella company makes the payment to your bank account. The payment is based upon the total time you’ve worked, but there’s a deduction on this income as well. It’s the taxes that you and the umbrella company both have to pay. For this, you’ll get a payslip comprising all the details. These deductions can be linked to various schemes like income tax, insurance, umbrella company’s fees and margin, apprenticeship levy, and pension contributions.


Umbrella companies can be a blessing for those who want to pursue freelancing but don’t want to bear the day-to-day hustles or the huge amount of liabilities on their own. Working under an umbrella company not only enables independent contractors to focus better and get more assignments or projects but also removes all the additional pressure points. 

The income tax calculation and filing are done by them and automatically deducted. So, for beginners, the payment procedure is quick and pretty simple. Also, according to the nature of your contract, you’ll be able to claim a few business expenses, which makes your savings even bigger. 

So, an umbrella company is a simple solution for freelancers that gives them the priority treatment usually reserved for employees but never interferes with their overall freedom.

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