Who uses an umbrella company?

Umbrella companies are used by U.K.-based independent contractors and clients. They’re most common in industries with project-based work, like IT, engineering, and creative services.

What’s the purpose of an umbrella company?

The purpose of an umbrella company is to simplify payroll and taxation for contractors and the client companies that rely on them. It lets contractors work on different assignments while getting access to employment benefits. This removes the need to manage their own limited company.

How is the IR35 legislation related to umbrella companies?

IR35 is U.K. legislation designed to determine a contractor's worker status for tax purposes. If a contractor's working arrangement is found to be similar to that of a permanent employee ("inside IR35"), they must pay tax accordingly. A compliant umbrella company helps businesses and contractors manage IR35 rules by deducting PAYE and National Insurance contributions.

Are umbrella companies good for workers?

Working through an umbrella company is a trade-off between benefits and risks. On one hand, this model offers simplicity, a continuous employment record, and access to benefits like holiday pay. Net pay is often lower because deductions, including the employer's contributions, are taken out of the contract rate. There's also a significant risk of engaging with noncompliant umbrella companies that promote illegal tax avoidance schemes.

Should I use an umbrella company to hire U.K. contractors?

Before you use an umbrella company to hire U.K. contractors, you should understand the risks and limitations. Umbrella companies are limited to the U.K. and only support payroll and tax compliance. Choose an alternative, like an EOR, if you want to hire globally or enjoy full-service HR support.

How can I hire global contractors without risk?

The safest way to hire workers globally is through a reputable EOR with a global contractor solution. Our Contractor offering ensures timely payments and correct worker classification. This protects your company from compliance risks, wherever you choose to hire.

What Are Umbrella Companies? A Complete Guide

Key takeaways

Purpose: An umbrella company is an intermediary firm, common in the U.K. It employs temporary workers or independent contractors and manages their payroll and administrative tasks. The umbrella company invoices the end client, deducts a fee, and then pays the worker.
Pros: Contractors gain employment rights and simplified tax handling. Hiring companies reduce their administrative and compliance burdens.
Cons: The umbrella model is region-specific and not scalable for global hiring. It also includes risks like noncompliant tax schemes and a lack of transparency in fees.
EOR vs. umbrella company: A global EOR handles all aspects of employment. It offers secure, scalable, and compliant global hiring.
A global alternative: G-P helps companies of all sizes hire full-time employees and contractors in 180+ countries, managing the full worker lifecycle.

An umbrella company is a popular way to engage skilled contractors without the need to hire them directly or set up additional payment processes. That said, this model has limitations and risks, especially for global companies. This guide explains how umbrella companies work, their benefits and limitations, and how they compare to employers of record (EORs).

What does "umbrella company" mean?

An umbrella company is an intermediary business that employs workers who act as independent contractors for client companies. These contractors work on temporary, fixed-term assignments for various end clients. The umbrella company handles all the contractors' payments, taxes, and administrative tasks.

In exchange, umbrella companies charge a fee, called a margin, which they deduct from the contract rate.

While the contractor completes assigned work for the end client, the umbrella company legally employs them. The umbrella company signs a contract with the contractor and another with the recruitment agency or end client. The umbrella company processes payments, deducts the correct taxes, and pays the contractor. This saves administrative time and effort for the other parties.

Umbrella companies operate in the U.K. The model isn’t common in other jurisdictions, though similar models exist in some countries.

What does an umbrella company do?

Contractors can begin working with an umbrella company by following these steps:

Signup: The contractor signs a formal contract of employment with the umbrella company, making them its legal employee. This contract gives the worker employment rights, like holiday pay, sick pay, and pension contributions.
Client engagement: The umbrella company signs a business-to-business contract with a recruitment agency or the end client. This contract outlines the contractor's assignment, deliverables, and payment terms.
Work: The contractor carries out their assignment, tracking both hours and deliverables.
Timesheet submission: At the end of each payment period, the end client approves their timesheet. The contractor then submits their approved timesheets to the umbrella firm.
Invoicing: Using the approved timesheet, the umbrella company invoices the recruitment agency or end client the full rate for the contractor's work.
Payroll processing: Once the end client pays the invoice, the umbrella company processes payroll. It deducts all necessary employer costs, including National Insurance contributions, the Apprenticeship Levy, and a fee.
Payment: After deducting all employer costs, the remaining amount becomes the contractor's gross pay. From this, the umbrella company deducts pay-as-you-earn (PAYE) tax and employee National Insurance contributions. The final amount is the contractor's net pay.

Benefits of using an umbrella company

In the U.K., the umbrella model offers benefits for both independent contractors and the companies that hire them. For contractors, the advantages include:

Convenience: Contractors don't need to set up and manage their own limited company, handle invoicing, chase payments, or file tax returns. Instead, they do their work, submit a timesheet, and get paid.
Employment rights: As employees of the umbrella company, contractors are entitled to rights that are unavailable to sole traders. Some of these rights include statutory sick pay, maternity or paternity pay, and holiday pay.
Continuous employment: Working through one umbrella company across end-client assignments creates a continuous employment history. This can help when applying for credit, as it shows a stable income history that could otherwise be difficult to prove.

For end clients and recruitment agencies, the benefits include:

Less admin work: The umbrella company takes on all payroll and HR duties for the contractor. This means the hiring company doesn't have to calculate taxes or manage other HR tasks.
Easy compliance: The model helps reduce the risk of worker misclassification. This is valuable in the U.K., where IR35 legislation imposes strict rules on determining a contractor's tax status. By making the contractor an employee, the umbrella company takes responsibility for PAYE, reducing the risk of penalties for the end client. An umbrella company is sometimes called a PAYE umbrella, because it supports PAYE tax compliance.

Risks of using an umbrella company

Despite the benefits, the umbrella model has risks for contractors:

Lack of transparency: Some umbrella companies have complex fee structures that make it difficult to understand the true cost of working through them.
Tax avoidance: The most severe risk is engaging with a noncompliant umbrella company that uses a tax avoidance scheme. These schemes are sometimes called disguised remuneration. It's when they promise unusually high take-home pay by paying a portion of the worker's salary as a tax-free "loan" or "grant" that's never meant to be repaid. These schemes are illegal in the U.K.. If caught, the umbrella company and contractor are both liable for all unpaid taxes and potential penalties.
Reduced take-home pay: Even with the best umbrella companies, a contractor's net income may be lower than they expect. The funds the end client pays must cover all employment costs, including employee and employer deductions. These deductions happen before calculating the contractor's gross pay. This can reduce their net earnings compared to operating their own limited company.
Limited control: Contractors rely on the umbrella company for payment. If it has poor processes or cash flow issues, payments can be late, wrong, or missed. While legal options exist in these cases, they're time-consuming to pursue.

Umbrella companies in different regions

The umbrella company isn't a global model. It's a solution that has evolved in response to tax and employment laws of particular countries — mainly the U.K.. Here's how umbrella companies or similar models look in different regions:

U.K.: The U.K. is the main market for umbrella companies. The model is a direct response to the IR35 off-payroll working rules. This legislation aims to identify "disguised employees" — contractors who work like full-time employees but use a limited company to pay less tax. If a contractor is found to be "inside IR35," they must pay taxes like an employee. A compliant umbrella company follows this rule by deducting PAYE taxes at the source.
France: A similar model called portage salarial ("salary carrying") exists in France. This is a formal three-way relationship between a contractor, a portage company, and a client company. Like an umbrella company, the portage company employs the contractor and manages all administrative tasks. France has specific rules for minimum salaries, professional experience, and the types of assignments that are allowed for the portage model.
U.S.: The U.S. employment landscape is strictly divided between W-2 employees and 1099 independent contractors. Unlike U.K. umbrella companies, these solutions don't convert contractors to employees. A professional employer organization (PEO) co-employs W-2 employees, while an agent of record (AOR) handles administrative tasks related to 1099 contractors. Both handle payments and compliance, but operate under different legal frameworks than umbrella companies.
Global: Relying on region-specific solutions for global hiring is risky. Each country has its own laws, and a model that works in one location may not be compliant in another. An EOR addresses this challenge and provides one unified solution for compliant global employment for all worker types.

Umbrella company vs. EOR

Knowing the differences between an umbrella company and an EOR is crucial to choosing the right model for your goals:

Scope: An umbrella company mainly manages payroll for independent contractors in the U.K. It handles timesheets, invoicing, and tax deductions. An EOR, on the other hand, is an end-to-end global employment solution. It becomes the legal employer for your global team members and manages the entire employee lifecycle. This includes generating a locally compliant employment contract and managing benefits and payroll. With an EOR like G-P, you have the flexibility to hire both employees and contractors with ease.
Scalability: The umbrella model is a U.K.-centric solution. It isn't a scalable approach for a global company. An EOR is a global hiring solution. For example, G-P EOR lets you hire in 180+ countries through an AI-powered global employment platform.
Worker type: Umbrella companies are designed for independent contractors working on fixed-term projects in the U.K. An EOR helps you hire full-time employees and contractors globally. This gives you the flexibility to manage your entire global workforce through one provider.
Compliance: With an umbrella company, the hiring company still bears risks, especially if the umbrella provider is noncompliant. An EOR is responsible for adhering to all local labor and tax laws, minimizing the compliance risks for your business.

Hire anywhere with G-P

To build a global team, you need a more robust and scalable solution than an umbrella company.

G-P offers compliant global hiring for companies of all sizes. Our industry-leading global employment products and EOR solutions let you hire top talent in 180+ countries, without the legal complexities.

And if you need contractors for specialized projects, G-P Contractor™ simplifies hiring and paying international contractors in 190 countries and over 130 currencies.

Book a demo to discover global hiring made simple.

What is an umbrella company?