How does Umbrella Company work?

03 Aug, 2021

Umbrella companies have existed for nearly two decades. Before their existence, the majority of freelancers and contractors worked either through their own limited company or as an employee of a recruitment agency (or the end-client) on a PAYE basis.

How does Umbrella Company work?

Today, it is estimated that over 400,000 contractors and freelancers in the United Kingdom are paid via umbrella companies – a staggering figure! The number increased significantly in April 2017 as a result of changes in off-payroll rules in the public sector. More rise in numbers when new regulations governing off-payroll employment are implemented in the private sector in April 2021.

What is an Umbrella Company?

An umbrella Company establishes your status as a legal employee and takes care of all the paperwork. It's the simplest option for the majority of contractors, as there are no unexpected tax bills, and because you have one continuous employment relationship, it's also much easier to secure important things like loans and mortgages.

Let us discuss how Umbrella Company works and benefit you as a contractor -

  1. The Contractor becomes an umbrella company employee under an overarching employment contract that allows them to take series of assignments with the same or different agencies/end clients.
  2. Umbrella Company signs a business contract with the Contractor’s agency or end client.
  3. After signing the contract, the contractor isrequired to complete and submit timesheets specifying the details of the hours worked to the agency and the umbrella company. This can be done weekly or monthly, depending on the billing agreement.
  4. Once the timesheet is submitted, the umbrella Company will raise an invoice to the agency (or end-client, if no agency).
  5. Once the payment is received by the Umbrella Company, they process the payroll and pay a salary to the contractor after deducting income tax, national insurance contributions, the agreed-upon umbrella fee/margin, and pension contributions (if applicable).
  6. Finally, Umbrella Company issues form P60 (Payslip form) and form P11D (expenses and benefits form) to the contractorat the end of the tax year, which give them details about their net salary and the tax deducted, and the expenses which they can reclaim against their tax bill.

The Contractor becomes an employee after completing series of assignments.

Umbrella Company signs a business contract with the contractor’s agency or end client.

The Contractor submits the timesheet specifying the details of working hours.

Umbrella Company raises an invoice to the agency or end-client (If no agency).

Umbrella Company processes the payroll after deducting income tax, NIC and margin fee.

Umbrella Company issues form P60 and P11D to the contractor at the end of the tax year.

Also See: Is Umbrella Company Paying The Right Tax?

Benefits of joining DNS Umbrella

  • Receive payments on time and in accordance with HMRC regulations.
  • You are entitled to employment benefits like a permanent employee, such as statutory sick payments, maternity/paternity pay.
  • You are treated as an employee for employment law and purposes, regardless of whether you are inside or outside IR35.
  • Maintaining a relationship with the same umbrella company ensures continuity of employment, which is necessary when applying for mortgages. Even if you work with multiple agencies, you will have continuous employment across all of your contracts.
  • Umbrella company handles and takes care of all your tasks, including administration, invoicing, payment collection and payroll processing.
  • You are not required to file an annual self-assessment form, unlike limited company directors, unless you generate other untaxed income from other sources or earning more than £100,000 in a tax year.
  • You are fully insured by the Umbrella company’sinsurance package of professional indemnity insuranceand public liability.
  • You have full access to employee reward schemes setup by the Umbrella Company.
  • Option of claiming tax relief on allowable business expenses.

However, if you find yourself contracting inside IR35 or not interested in being a director of your own limited company, an umbrella company may be the perfect solution for you. Please speak to one of our specialists at DNS umbrella by calling us on 020 3500 2615 or sending us an email at

Also See: Understanding The Off Payroll Working Rules