What Is an Umbrella Company? A Guide for UK Contractors
- Compare Your Pay
- Jul 29, 2025
- 5 min read
If you’re new to contracting or freelancing in the UK, you’ve probably come across the term umbrella company. But what does it actually mean? Is it something you need to consider as a contractor? And how does it affect your take-home pay? In this guide from Compare Your Pay, we break it all down—what umbrella companies are, how they work, and whether they might be the right fit for you.
What Is an Umbrella Company?
An umbrella company is a business that employs contractors who work on temporary assignments, usually through recruitment agencies. The umbrella company acts as an intermediary between you (the contractor) and the end client or agency.
In simple terms, the umbrella company:
Invoices the agency or client for your work
Pays you through PAYE (Pay As You Earn), just like a regular employee
Handles your tax, National Insurance, and workplace pension contributions
Charges a fee (usually weekly or monthly) for providing this service
So instead of setting up your own limited company or operating as a sole trader, you work under the umbrella company’s structure. It's a hassle-free option, especially for contractors on short-term assignments or those who don’t want the admin of running a company.
How Does an Umbrella Company Work?
Here’s a step-by-step breakdown of how working through an umbrella company typically works:
You get a contract through a recruitment agency or client.
You sign up with an umbrella company and become their employee.
You submit timesheets to both your agency and the umbrella company.
The umbrella company invoices the agency or client for your work.
The agency/client pays the umbrella company.
The umbrella company pays you, after deducting:
Income Tax (PAYE)
Employee National Insurance contributions
Employer National Insurance contributions
Pension (if enrolled)
Apprenticeship Levy (if applicable)
Their margin (i.e. the fee for managing your payments)
What Are the Benefits of Using an Umbrella Company?
For many contractors, an umbrella company offers a simple and low-risk way to get paid.
Here are some key benefits:
✅ Hassle-Free Admin
No need to worry about setting up a limited company, filing taxes, or keeping detailed financial records.
✅ PAYE Tax
You're paid like a regular employee through the PAYE system, so your tax affairs are straightforward and managed for you.
✅ Employee Rights
You’re technically an employee of the umbrella company, so you’re entitled to:
Statutory sick pay
Holiday pay
Maternity/paternity pay
Workplace pension
✅ Quick Setup
Most umbrella companies can get you set up within 24 hours—ideal for urgent or short-term roles.
What Are the Downsides?
While umbrella companies are convenient, they’re not always the most tax-efficient route. Here’s what to consider:
❌ Employer’s National Insurance Comes Out of Your Rate
Umbrella companies deduct Employer’s NI and other employment costs from your contract rate. This can be confusing, as it’s not how things work with permanent roles. Always clarify what your “assignment rate” really covers.
❌ Less Control Over Finances
Unlike with a limited company, you can't claim as many business expenses or make decisions about how your income is structured.
❌ Umbrella Fees
You’ll be charged a weekly or monthly fee—typically £15–£30 per week—for the umbrella’s services. While this is usually small, it does eat into your take-home pay.
When Is an Umbrella Company the Right Choice?
Using an umbrella company can be a smart move if:
You’re on a short-term contract (e.g. a few weeks or months)
Your contract is inside IR35 (meaning you’re considered a ‘disguised employee’ for tax purposes)
You don’t want the hassle of running a limited company
You’re just testing the waters as a contractor before committing long-term
It’s also often the only option for contractors working through certain recruitment agencies that require PAYE-compliant structures.
IR35 and Umbrella Companies
One of the main reasons umbrella companies have grown in popularity is the IR35 legislation. If a contract is inside IR35, you can’t benefit from the tax advantages of a limited company—and working via an umbrella company becomes the most compliant way to operate.
Since April 2021, many public sector and private sector organisations have become cautious about IR35 and are steering contractors toward umbrella models, especially where status is unclear.
What Should You Look for in an Umbrella Company?
Not all umbrella companies are created equal. Here are a few things to check before signing up:
Clear and transparent fees
Good customer support
Same-day or next-day payment
At Compare Your Pay, we help you compare umbrella companies on key features like fees, payment frequency, support, and compliance—so you can make an informed choice.
Final Thoughts
An umbrella company isn’t the only way to work as a contractor in the UK—but it’s often the easiest and most compliant route, especially if you're just starting out or working inside IR35.
It may not be the most tax-efficient solution compared to a limited company, but for many, the simplicity and low admin make it worthwhile.
At Compare Your Pay, we’re here to help you make sense of your options. Whether you’re comparing umbrella companies or wondering if you should go limited, our resources and tools give you the clarity you need to make the right choice.
Ready to Compare?
Use our free tools to compare umbrella company fees, services, and take-home pay. Get started today with Compare Your Pay—because your hard work deserves the best return.
Frequently Asked Questions: Umbrella Companies
1. What is an umbrella company?
An umbrella company is a third-party organisation that employs contractors who work on temporary assignments, usually through a recruitment agency. The umbrella handles payroll, tax, National Insurance, and other admin duties, allowing contractors to focus on their work.
2. How does an umbrella company work?
You become an employee of the umbrella company. The client pays the recruitment agency, who then pays the umbrella. The umbrella processes your pay, deducting tax, employee National Insurance, and their margin before passing your net salary to you.
3. Do I still get employment rights with an umbrella company?
Yes. You’re considered an employee, so you’re entitled to statutory rights such as sick pay, holiday pay, pension contributions, and maternity/paternity leave.
4. How is my pay calculated through an umbrella company?
The rate you’re quoted is usually an uplifted ‘umbrella rate’ (higher than a standard PAYE rate) to account for employment costs like Employer’s NI and the umbrella margin. After deductions, your take-home pay is typically around 60–70% of the umbrella rate.
5. Is working through an umbrella company IR35 compliant?
Yes. Since you’re taxed as an employee, IR35 does not apply in the same way it does to limited company contractors. Umbrella companies offer a straightforward option for contractors affected by IR35.
6. What are the pros of using an umbrella company?
Simplicity – minimal admin for the contractor
No need to run a limited company
Full statutory employment rights
Often ideal for short-term or inside IR35 contracts
7. What are the cons of using an umbrella company?
Lower take-home pay than operating a limited company
Less control over finances
Some umbrellas charge high fees or operate non-compliant schemes – due diligence is key
8. Can I claim expenses through an umbrella company?
Usually, only a limited set of allowable expenses can be claimed, and only in specific circumstances (e.g. if you're under Supervision, Direction or Control, expenses are typically restricted). Always check with your umbrella for their policy.
9. Is an umbrella company right for me?
It can be a good fit if:
You’re on a short-term contract
Your role falls inside IR35
You want a hassle-free option without setting up a company
For longer-term or outside IR35 work, a limited company may be more tax-efficient.
10. How do I choose a reputable umbrella company?
Look for:
Transparent fees and pay illustrations
Clear expense and holiday pay policies
Good reviews or recommendations from trusted sources
