Umbrella companies have flourished over the past decade in the UK, and can offer a ‘hassle free’ structure to operate under for many contractors. With hundreds of suppliers on the market, we look at how a PAYE Umbrella scheme operates in practice.

What is an umbrella company?

A PAYE umbrella company is a standard UK limited company, operated by a third party acting as an ‘employer’ on behalf of its contractor employees.

A contract is signed between the umbrella company and recruitment agency (or end client) on behalf of the contractor who will be carrying out the assignment.

The umbrella provides a payroll service to its employees, processes all timesheets and invoices, and pays its employees a salary after allowing for deductions.

How does an umbrella company work in practice?

What about expenses?

You will be reimbursed for legitimate business expenses you have pre-agreed with your client or recruitment agency, just as any other traditional (permanent) employee would. These are known as ‘chargeable’ expenses.

You may also be allowed to reclaim the cost of any other business expenses you incur as a contractor, but only if your working situation is deemed not to be under the ‘Supervision, Direction and Control’ (SDC) of your client.

If your contract work is caught by the SDC rules, you cannot reclaim the costs of travel and subsistence.

Read the official background to these rules, which took effect from April 2016.

If you are not caught by the SDC rules, you should make a claim for any non-chargeable expenses via the self-assessment process at the end of the tax year in question.

What will my net take home pay be?

Importantly, assuming you are using a legitimate UK-based PAYE umbrella, your take home pay should be the same regardless of the payroll operator you are using. The only variable should be the margin (fee) charged by the umbrella.

Before signing up, ask all of your prospective umbrella companies to provide you with a take home pay illustration. This should be a clear, transparent breakdown of your income and costs.

As a new client to the agency, you should be provided with a Key Information Document which shows both your PAYE rate (upon which personal taxes are payable), and the umbrella rate (which is how much the agency will be billed for your time, and includes employment costs, such as Employers’ NI and the Apprenticeship Levy).

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