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Tips For Using an Umbrella Company

Tips For Using an Umbrella Company
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    An umbrella company is a separate organisation that acts as an employer for the contractors working on fixed-term contracts. It plays an intermediary role between the contractors and their end clients. The primary function of an umbrella company is to provide payroll services.

    Working under an umbrella company is entirely different from that of contracting through a limited company. This blog will provide you with top tips on how to use an Umbrella company.

    Limited Company or Umbrella company

    It would help if you chose the right trading solution option, a Limited company or umbrella company. Understand your needs and which payment structure you require. It is best to get advice from accountants who provide accountancy services to both umbrella companies and contractors.

    Getting started

    It is much faster and easier to set yourself up with an umbrella company than forming a limited company. The formation of a limited company requires you to choose a name, register with Companies House, and decide on the share structure or employees. But none of these is needed if you register with an umbrella company.

    Background of the Umbrella company

    If you choose an umbrella company as the right trading solution option for you, then, firstly, do a deep analysis on the background of the umbrella company, how long it has been there, its credit rating, and quality of service.

    Before registering with an umbrella company, make sure you get the complete picture of its fee structure. Find out if the fees are inclusive or do you need to make any extra fees for completing tax forms, expenses processing, and so on. Ask how much exactly you must pay weekly or monthly.

    Make sure you get an entire contract of employment

    Once you sign up for a contract with an umbrella company, you become an employee under them. So, ensure that you get a comprehensive employment contract from them, including all the statutory rights and benefits that UK employees are entitled to.

    Understand how an umbrella company works

    At the outset, an umbrella company payroll might sound complicated, but it is very straightforward. Once you enrol under an umbrella company, you become an employee, and the umbrella company becomes your employer. The umbrella company obtains the gross funds from your end clients or the agency and processes using HMRC’s tax system Pay As You Earn (PAYE).

    You will receive your net salary after all deductions are made, including income tax and National Insurance Contributions (NICs). On a broader term, you will be treated as a permanent employee. The umbrella company deducts a margin for this payroll service, which is the only income it generates.

    Obtain a take-home pay projection

    Before you set up with an umbrella company, you should request a precise take-home pay calculation from several umbrella companies. This calculation would provide you with an understanding of their pay and help you determine your net salary.

    Mainly the projections would not fluctuate across compliant umbrella companies, as they must process the payments in the same manner. So, requesting a take-home projection would place you on the safer side by not misleading you to an inflated pay calculated on your umbrella company.

    You must look for the following details in the take-home pay projection provided by the umbrella company,

    • The tax codes
    • Number of working days considered
    • Deduction breakdown
    • Whether it includes expense allowances

    Only choose compliant umbrella companies

    It would help if you chose compliant umbrella companies. Undoubtedly, you have ample choices, as there are over 500 umbrella companies in the UK. It is highly recommended that you only consider those accredited by Freelancer & Contractor Services Association (FCSA), such as WIS Umbrella.

    Freelancer & Contractor Services Association (FCSA) are responsible bodies in the UK that make sure the supply chains of temporary workers are compliant with the HMRC rules, laws, and regulations. The umbrella companies accredited by Freelancer & Contractor Services Association (FCSA) undergo strict audits and assessments.

    Hence, they always comply with the rules and regulations while acting in the best interest of employees.

    Understand it is not likely to claim expenses

    According to the legislation supervision, direction, and control (SDC) introduced in 2016, those considered ineligible by HM Revenue and Customs cannot claim tax relief on travel and subsistence expenses.

    In other words, an umbrella employee subject to supervision, direction, and control (SDC) cannot claim tax relief on travel and subsistence expenses. From the perspective of HMRC, an employee who is subject to SDC is effectively a permanent employee who is not entitled to any tax savings.

    Exit without fees

    The umbrella company is your employer, and you are an employee. Therefore ultimately, it should not charge any penalties when you leave. But ensure that you had complied with all their terms and conditions of employment, particularly about the notice periods and termination clauses. Also, if you have any surpluses, make sure you request those as your final payment.

    Keep your limited company

    If you are used to operating inside IR35 through a limited company, we recommend that you keep your limited company open. By doing so, you can return to your limited company at a later date. You might want to obtain the services of an umbrella company if you have decided to accept an assignment inside IR35, but that does not mean all your future roles fall inside it.


    Before moving into an umbrella company, it is best to analyse the necessity of doing so. Understand the advantages and disadvantages of going under an Umbrella company versus forming a limited company.

    Given you had chosen the option of working under an umbrella company, the above tips should guide you through obtaining an efficient and effective service from an umbrella company in terms of all aspects.

    You can contact our accountants at WIS Accountancy Ltd via online chat or by simply giving a ring on 0203 0111 898 for further guidance on umbrella companies.

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