What is an umbrella company? Self-employed contractors can join an umbrella business, often known as a PAYE umbrella, as an alternative to forming (and operating through) their own limited company. When you join an umbrella, you become an employee of the company. The umbrella works as an intermediary for you and your recruitment firm.
Operating a limited company may be difficult, and it isn't always the ideal option for contractors. If you're a new contractor, you may not want to go through the hassle of forming a limited liability corporation right soon. Similarly, if you know you'll only be contracting for a short time, you won't want to go to the trouble of forming a limited liability business just to have it dissolve later.
When it comes to payment, the contractor records timesheets and gives them to the umbrella firm. From there, payroll is handled. However, if you perform all of your contracting through an umbrella company, you won't get the tax benefits of a limited business because pay is subject to PAYE regardless of the IR35 status of the contract.
Advantages of An Umbrella Company
Contractors gain rights – as an umbrella employee, you can get statutory sick pay, holiday pay, maternity and paternity leave, and a workplace pension.
Less administration – the umbrella handles invoicing, payment collection, timesheet distribution, and payroll.
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