What is an Umbrella Company & How Does It Work?

08/05/2021 - 10 minutes read

Umbrella company is one of the most popular options being offered to individuals whose contracts using their PSCs have been deemed to be inside IR35 regulations.

Umbrella Company UK

What is an Umbrella Company & How Does It Work?

What is an Umbrella Company

It is generally agreed that an umbrella company is a company that employs a temporary worker (an agency worker or contractor) on behalf of an employment agency. The agency will then provide the services of the worker to their clients.

Umbrella companies do not find work for the workers they employ.

They can work differently but most umbrella companies employ workers using an employment contract that will set out your terms and conditions. This means the company must comply with employment law.

Find out more about employment rights here.

If you are employed by an umbrella company, the tax rules on agency workers and off-payroll working (IR35) will not apply to you.

Who will pay you

You are paid by the umbrella company because they are your employer. They will:

  • – pay you for the work you do for the employment agency’s clients
  • – deduct any Income Tax and employee National Insurance contributions due under PAYE (Pay As You Earn) from your pay

How you get paid

The client you work for pays the agency for your services.

The agency deducts a fee for placing you with the client and pays the rest of the money (sometimes known as the assignment rate or the limited company rate) to the umbrella company.

This rate is different from the rate you get paid from the umbrella company, because of the additional costs for the umbrella company, which include:

  • – administration costs (sometimes charged separately to you by the umbrella company)
  • – employer national Insurance contributions
  • – employer workplace pension contributions
  • – holiday pay
  • – other amounts to cover other specific costs, such as Apprenticeship Levy

The rate paid to the umbrella company by the agency will need to cover the costs of the employer’s national Insurance contributions. The umbrella company will use this money to pay employer contributions and not deduct the contributions from your gross pay.

What you get paid from an Umbrella Company

The rate you get from the umbrella company is sometimes known as your contract rate and should be set out in your employment contract. It will normally be an hourly rate at the National Minimum Wage plus another taxable amount often described as a bonus or additional pay. This is your gross pay (your pay before deductions).

If any of this amount is described as non-taxable, your umbrella company could be involving you in a tax avoidance scheme.

Your gross pay is then subject to deductions of Income Tax and employee National Insurance contributions through PAYE, as well as any other deductions such as your workplace pension contributions.

The remaining amount is your net pay (the amount you take home).

An umbrella company cannot by law deduct employer National Insurance contributions from your gross pay.

If you think employer National Insurance contributions have been wrongly deducted from your gross pay, or any other incorrect deductions have been made, contact your employer (the umbrella company).

If this does not work, contact ACAS (Advisory, Conciliation and Arbitration Service)Citizens Advice, or your trade union representative.

Umbrella Company & holiday entitlement

You are entitled to get paid statutory annual leave which is based on the hours you work.

If you leave the umbrella company with annual leave owing to you, the company must pay you for it.

Umbrella Company: How to understand your pay

Before you start work you’ll be given a key information document by the employment agency which will include all the details about what you’ll be paid.

Umbrella companies normally give you a listed reconciliation statement and a payslip.

Umbrella Company - How does it work

How Does an Umbrella Company Work

Key information document

This will give you information about your pay and other details about your employment. It will show you the deductions and fees in relation to the assignment rate and contract rate and how this affects your gross and net pay.

The document should make it clear what the agency will pay the umbrella company and what you will receive from the umbrella company (your contract rate).

Find out more about the key information document here.

Reconciliation statement

The reconciliation statement will normally give a breakdown of the assignment rate received by the umbrella company from the agency which lists the umbrella company’s costs, including employer National Insurance contributions.

These amounts should be deducted from the umbrella company’s assignment rate, not your contract rate.


The payslip will then include a separate breakdown listing your gross pay and deductions, including Income Tax and employee National Insurance contributions, to arrive at the net take-home pay.

The payslip must show:

  • – your pay (which is your contract rate) before and after any deductions
  • – the amount of deductions – these may change each time you’re paid, for example, the amount of Income Tax and employee National Insurance contributions you pay depends on the hours you work
  • – the number of hours you worked, if your pay varies depending on time worked

Find out more about Income Tax rates and allowances and National Insurance contributions.

Your employer is not allowed to make deductions unless:

  • – they are required by law
  • – you agree to them
  • – your contract says that they can

Find more information on understanding your pay here.

Umbrella Company & tax avoidance

Most umbrella companies are compliant with the tax rules but some use tax avoidance schemes.

How the schemes work

Some umbrella companies may claim to allow you to keep more of your earnings than others, which means it could be a disguised remuneration tax avoidance scheme. They could also involve third parties.

Tax avoidance schemes do not work, including those that may claim to be tax-efficient or offer to increase your take-home pay. They sometimes carry high, non-refundable fees and are often provided by, or through, offshore promoters.

If you are asked to sign an annuity, loan, or other agreement involving a non-taxable element of pay, especially if this involves someone other than your employer, it may be a tax avoidance scheme.

Find out more about the signs of spotting tax avoidance here.

If you think you are using an avoidance scheme

You should contact HMRC as soon as possible, so we can help you get out of it and settle your tax affairs.

If you are caught using a tax avoidance scheme, you’ll have to pay the tax that is legally due, plus interest and you may have to pay a penalty. This is on top of the fees you may have paid to the person who sold you the scheme.

Not paying the right amount of tax means that vital public services like schools and hospitals do not get all the money they need.

HMRC does not approve or endorse umbrella companies or tax avoidance schemes.

Find out how to identify schemes that wrongly claim to increase your take-home pay if you’re a contractor or agency worker.

How to report an umbrella company or other employer

If you think the umbrella company you work for, or another employer, is not complying with the tax rules, you can report it to HMRC using the online form.

Need help with processing payroll for an Umbrella Company?

Contact MCL Accountants Southend on 01702 593 029 to optimise your tax position or if you need any assistance with processing payroll for an umbrella company or its annual accounts.