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Umbrella companies

An umbrella company often acts as an employer to contractors, usually through a recruitment agency; the recruitment agency will issue a contract to a limited company. An umbrella company will issue an invoice to the client for payment then processes timesheets and payroll for the contractor while offsetting business expenses against their tax.

Key points

  • An umbrella company acts as an employer to agency contractors.
  • There is a 3 way relationship - the worker, the umbrella company and the client.
  • The client will pay the umbrella company who makes the relevant deductions and then pays the worker.

An agency worker hired under the standard three-way relationship is regularly classed as a worker, and will be entitled to the same day 1 rights as other agency workers. If an agency worker is classed as an "employee" whether of the employment business or an umbrella company they will have enhanced employment rights.

Where an umbrella company is involved, the payment for work is agreed between the worker and the hirer, and is paid to the umbrella company as the company's income. The umbrella company retains its fee and the remainder is then classed as gross pay from which income tax is deducted, the worker is then paid at the net amount.