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What Is An Umbrella Company? A Guide for Contractors

Contractor Management
CXC Global6 min read
CXC GlobalApril 10, 2023
CXC Global

If you work as a freelancer or an independent contractor, you have a few options when it comes to structuring your business.

Most people who are just starting out keep things simple by setting up sole trader status, which allows you to start working and invoicing your clients straight away.

However, many companies prefer not to work with sole traders because of perceived risks in terms of tax liability and employment rights.

And there may come a time when you want to create a legal separation between you and your business by setting up a limited liability company (LLC). 

While this status comes with advantages, it also represents a significant administrative burden which can take time away from your actual work. 

In recent years, a new solution has emerged: working through an ‘umbrella company’.

These organisations employ freelancers and contractors as permanent employees, invoicing their clients on their behalf.

Through this arrangement, contractors can benefit from the security of a permanent employment contract while still working for their clients.

What is an umbrella company?

An umbrella company is an organisation that employs independent contractors who work on temporary contracts.

The umbrella company invoices the client (the company that the contractor actually works for) and then pays the contractor after making deductions for things like tax and National Insurance contributions. 

Working through an umbrella company can be a convenient option if you don’t want the hassle of setting up a limited company.

It’s particularly common for contractors who move regularly from one client to another, working on short-term contracts.

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How do umbrella companies work?

Umbrella companies work slightly differently in each country, but the basic premise is that they engage independent contractors or freelancers as employees.

Contractors submit timesheets to the umbrella company at the end of each month, and the umbrella company bills the client company for the appropriate amount of work.

Umbrella companies don’t find work for their contractors — their role is purely administrative.

Since contractors working for umbrella companies are actually employees, the umbrella company has to deduct taxes, social security contributions and other charges (depending on the country) before paying its contractors.

If you choose to work through an umbrella company, you’ll pay taxes and get a payslip each month, just like if you were an employee of a company in the traditional sense. 

The Costs of Using an Umbrella Company

Umbrella companies charge contractors a fee for using their services.

In the UK, this is usually a fixed weekly or monthly fee no matter how much you earn.

In other countries, such as France, Belgium and Switzerland, it’s normally a percentage of the amount you earn over the month.


When you work through an umbrella company, you’re legally an employee.

This means that you have to pay income tax and social security contributions exactly like any other employee.

It’s the umbrella company’s responsibility to deduct these charges from your pay. 

Since umbrella company contractors are legally employees, you can’t usually reduce your tax bill by claiming business expenses if you work through an umbrella company.

You may be able to charge your client for certain expenses like travel outside of your usual commute and food and accommodation while working away from home.

These expenses need to be submitted, approved, and reimbursed to you by your client on top of your normal pay.

Umbrella Companies in the UK

In the UK, umbrella companies usually employ contractors on behalf of a recruitment agency or staffing agency.

This means that you’ll form an agreement between four parties: the contractor, the agency, the umbrella company, and the client company. 

In this case, the agency finds work for the contractors and outsources administrative tasks like payroll to the umbrella company.

The client you work for will pay the agency for your services, then the agency will deduct a fee for placing you with the client and forward the rest to the umbrella company.

The umbrella company handles deductions for tax and National Insurance and pays you the rest as a monthly salary. 

What are The Benefits of Working Through an Umbrella Company?

Working through an umbrella company has certain advantages which can make it an attractive option for contractors.

Here are some of the main benefits:


When you work through an umbrella company, you are an employee.

That means that you’re entitled to the same employment rights as any other employee. In the UK, that includes: 

  • The National Minimum Wage
  • Sick leave and Statutory Sick Pay 
  • Maternity or paternity leave and Statutory Maternity Pay 
  • Annual leave (and holiday pay)
  • Paid overtime 
  • Enrollment into a pension scheme

This can be a huge benefit, as it removes some of the uncertainty that’s usually associated with being self-employed.


Even if you complete multiple short-term contracts for various different companies, the whole time you’re employed by an umbrella company counts as one continuous period of employment.

This can make it easier to secure things like loans and mortgages, which is often difficult for contract workers.


Working through an umbrella company is an alternative to setting up a limited company, which comes with a significant administrative burden.

Limited company directors have to keep records about the company, and file their accounts and a company tax return every year.

You may also need to work with an accountant, which can be expensive. 

When you work for an umbrella company, you don’t have to do any of this.

The umbrella company handles all the necessary paperwork to employ you as a PAYE (pay as you earn) employee. 


Some umbrella companies also offer other benefits to try and convince people to use their services.

These might include things like high street discounts or discounts on health insurance. 

What are The Disadvantages of Working Through an Umbrella Company?

It’s also important to consider the disadvantages of working through an umbrella company before you decide on this route.

For example: 


When you work through an umbrella company, you pay taxes and other contributions at the same rate as other employees.

You’ll also have to pay a fee to the umbrella company. 


If you work through an umbrella company, you’ll have less control over things like when and how you get paid.

While some contractors like the stability of having a monthly salary, this can be offputting to people who are used to running their own business.


While most umbrella companies are compliant with tax law, there are some who use tax avoidance schemes.

Usually, these companies claim to be ‘tax-efficient’, enabling you to increase your take-home pay.

While this might be tempting if you want to up your income, it is a form of tax fraud and needs to be taken seriously. 

This means that when you’re shopping around for an umbrella company, you need to do your due diligence and ensure that they’re operating within the law.

HMRC has a handy interactive risk checker that you can use if you think your work arrangement might involve tax avoidance. 

How Does IR35 Affect Umbrella Company Employees?

IR35 is a set of tax regulations that govern how ‘off-payroll’ workers are taxed.

This is usually anyone who works for an organisation, but is not its employee — like an independent contractor, for example. 

However, when you work through an umbrella company, you are a permanent employee, even if you’re not directly employed by the company you’re working for.

This means that IR35 rules don’t concern umbrella company employees, since they already pay their taxes through PAYE.

Learn More

If you’re just starting out as an independent contractor, or you’re a company looking to work with temporary workers for the first time, there’s a lot to figure out.

You can dive deeper into the world of non-payroll workers by checking out our content on IR35, the sole trader status and contingent workforce management

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At CXC, we want to help you grow your business with flexible, contingent talent. But we also understand that managing a contingent workforce can be complicated, costly and time-consuming. Through our MSP solution, we can help you to fulfil all of your contingent hiring needs, including temp employees, independent contractors and SOW workers. And if your needs change? No problem. Our flexible solution is designed to scale up and down to match our clients’ requirements.

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