What does an umbrella company do?

One area within the employment sector that has seen sustained and impressive growth over recent years is contracting. This sees businesses hire external workers or companies to complete specific work for them to a set deadline and pay scale. Contractors are not classed as permanent employees due to this. Naturally, this alone makes it beneficial to businesses that do not have the usual responsibilities or costs involved with hiring permanent staff.


To give an idea of the state of the contracting sector, it is worth over £100bn to the UK economy, and other countries such as France and Poland have similar statistics around contract work. This shows that contracting is a popular way globally for organisations to access key skills in an agile way for business support.


One key thing to do when using a contractor is to make the management of them as easy as possible. For many businesses now, this means using an umbrella company.


What does an umbrella company actually do?


In simple terms, an umbrella company is a third-party company that acts as an “employer” in legal terms for contractors. They sit in the middle of the contractor and their client to handle payroll and tax compliance issues once the work has been completed. This benefits both parties and has made umbrella companies an effective way to handle contract work for everyone.


For the contractor themselves, they do not have the hassle of processing their payroll or dealing with PAYE or NI contributions. The umbrella company will process all timesheets or invoices for the contractor and then pay them after taking off the necessary deductions.


But what about the benefits of using this sort of company for businesses themselves? Once more, the main one is the way that they make using contractors hassle-free and simple. Businesses have a real need to make using independent contractors less time-consuming and reduce the impact of any additional admin on their operation – umbrella companies meet this need effectively.


Why should businesses use an umbrella company?


If you are a business that uses contractors or is thinking about it, then the below shows why going through an umbrella company makes sense:


  • Payroll management – anyone who has handled their own payroll in terms of contractors knows that it can be tricky and time-consuming. If you have lots of contractors, then this is multiplied further with numerous timesheets flying around! When you add in any queries over expenses or classifications of status, it can become a real pain. If you contract through an umbrella company, then all this is taken off your plate and your staff can get on with their core tasks instead.


  • Full PAYE and NI compliance assured – although you will not be required to calculate or deduct this for contractors unless you are a recruitment agency, it is still something to be aware of. Businesses now must be sure that their contractors are doing what they should be at their end so that any future issues do not impact on them. An umbrella company will calculate and manage any tax or NI contributions applicable to HMRC before paying the contractor any money. This gives you total peace of mind that the contractors you use are 100% compliant with the law.


  • Professional third party for any issues – if there are problems over the payment that a contractor receives, then using an umbrella company gives you an objective third party with whom to speak. This can often be a much easier way to resolve any queries from either you or the contractor compared to dealing with each other directly.


  • Contractor insurance for peace of mind – many umbrella companies now will actually take on the burden of insuring their contractors. This is naturally great news for your business as it means that you do not have to, and you can send them out to work knowing that they are covered.


  • Less hassle from HMRC – for recruitment agencies that take contractors onto their books or businesses that engage directly with contractors, this is a big plus point. HMRC knows that respected umbrella companies fully engage with legal compliance around PAYE and NI, so tend to not investigate contractors who work through them. This means that they focus more on contractors who do not use umbrella companies, which could prove expensive for your business if they are found to be at fault in any away.


Using an umbrella company makes business sense


As the above has shown, it makes perfect business sense to use contractors through an umbrella company. Not only will it save you time and hassle, but it will also ensure that they are fully compliant with the relevant tax laws. This will give you the freedom and peace of mind to employ them for the work you need doing.




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