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Umbrella 101: How do umbrella companies work?

Whatever your views on the subject, it’s fair to say that umbrella companies attract a fair amount of commentary and conversation, especially online. The sheer amount of information (and misinformation) out there is pretty mind blowing, and that can make it really confusing and difficult for contractors when they are faced with the prospect of working through an umbrella company. As a business, we have always been advocates of complete transparency in everything we do. We’re committed to ensuring that every worker fully understands what they are signing up for, including what costs are involved and how much they can expect to take home.  It’s in the spirit of this that we’re going back to basics here; to cut through the noise and explain the function of an umbrella company and how it works in practice.

How does an umbrella company work? 

Put simply, an umbrella company acts as an employment intermediary between a contractor and a recruitment agency. The worker is employed by the umbrella company and their services are contracted out to the agency who places them on assignment with a client.  So, you are employed by the umbrella company to work on a series of assignments and you have an employment contract that reflects this. There’s no employment relationship between you and the agency or the end client.  Here’s how the contractual relationships work within the supply chain: umbrella company contracts The umbrella company processes your pay under PAYE and is responsible for deducting the correct PAYE tax and National Insurance and remitting them to HMRC. 

Costs, deductions and margins 

One of the biggest concerns among newcomers to umbrella working is employment costs and so-called “hidden charges”. Understandably so! But the explanation is quite straightforward. The amount an agency pays across to the umbrella company is known as the charge-out or assignment rate. This factors in allocations for Employers National Insurance, the Apprenticeship Levy and the operational costs of facilitating the assignment (at Liquid Friday we refer to these as Business Overheads)  This is why you might see roles advertised with two different rates - a “PAYE rate” and an “Umbrella rate”, with the umbrella rate always being higher to account for the uplift for employment costs.  When you work for Liquid Friday you will see the following full breakdown of deductions, on the Key Information Document (KID) you receive at the start of your assignment, and on your payslips. We’ll also talk you through these when you sign up.
  • Company Margin 
  • Business Overheads
  • Apprenticeship Levy
  • Retained Holiday Pay
  • Employers Pension Contribution
  • Employers NIC
  • Student Loan deduction (if applicable)
  • PAYE tax
  • National Insurance
  • Employee Pension Contribution

Holiday Pay and Pension

Umbrella company employees are entitled to holiday pay. This is a pro-rated amount of 28 days annual holiday, inclusive of UK bank and public holidays. The cost of this is included in the charge out rate paid by the agency or client. Most umbrella companies accrue this and hold it aside until you take time off, or until your employment ends. At Liquid Friday you also have the option of having your holiday pay advanced, in other words paid out with your wages each week.  You will also be auto-enrolled into an approved workplace payment after 12 weeks. This is a legal requirement but you can easily opt out of pension contributions if you prefer.  At Liquid Friday we also offer flexible pension options to give you the opportunity to choose what you save for retirement, by paying into a personal pension on a salary-sacrifice basis, which is very tax efficient. Find out more about this here  

Benefits - do your homework!

Working through an umbrella company actually comes with some pretty cool benefits. Firstly, it’s just a really simple, flexible way to get paid. You’ll be covered by comprehensive insurances and you’ll have access to Statutory Benefits, like SSP,  just like a permanent employee.  Being employed by a brolly also gives you continuity of employment, as you stay with the same employer as you move from assignment to assignment. This is useful when it comes to things like applying for a loan or mortgage. Those are the general benefits of umbrella working, but do your homework on added extras when you are choosing which umbrella company to join.  At Liquid Friday, we invest highly in bringing maximum value to our contractors - we know you have a choice of who you work with and we want you to be glad you chose us! We offer free contractor mortgage advice, a virtual GP service, Reward Club, pay advances and unlimited referral bonuses. And coming soon, the Liquid Friday app!  

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