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Your umbrella company questions answered

What is an umbrella company?

An Umbrella Company is a special type of service provider designed to provide PAYE payroll to contractors. The Umbrella will invoice an agency for the contractors time & expenses, and pay the contractor the funds less tax & fees.

Why use umbrella companies?

Umbrella Companies are great for first time contractors who have never contracted before. This is because they are quick & easy to work with, with set up taking less than a day. This means it’s the fastest way for contractors to get paid less tax.

What is umbrella vs PAYE?

There is no difference. A a result, all umbrella companies pay their contractors through the “pay as you earn” scheme. This means they pay your income tax & national insurance to HMRC and provide you with a payslip.

Am I an employee of the umbrella company?

Yes. In order to process your payments through PAYE, the umbrella company will become your employer. This won’t affect how you perform your contract, but it will mean you don’t need to complete a self-assessment or tax return.

What is an accredited umbrella company?

There are two main umbrella accreditations, FCSA & Professional Passport. Both of these have different requirements and standards. Some agencies will only work with an Umbrella Company if it holds one of these accreditations because they are perceived to operately “compliantly”.

What do I get in return for my umbrella fee?

An umbrella company will not only process your payments through PAYE. In addition, they will provide you with insurance cover for the work you perform, holiday pay and other statutory payments like sick pay. Some higher end umbrella companies will also offer perks like store discounts.

Why should I compare umbrella companies?

Not all umbrella companies offer the same benefits like faster payments. Some are accredited by external auditors. All this will contribute to the fee they charge for providing their payroll services.

How do I find the best umbrella company?

F-ndr has developed an umbrella company comparrison tool that’s designed ot help contractors compare, side by side, the UK’s most trusted umbrellas in order to help them find the best umbrella in the UK.


What is an umbrella company in the UK?

An umbrella company in the UK is a service provider that employs UK contractors (temporary workers) on behalf of an agency or an end client. The umbrella company employs the contractor in the UK for the single purpose of providing them with UK payroll services. Because of this, the contractor, while acting as if they are self-employed is actually an employee of the umbrella company for UK tax purposes.

As a result of the contractor actually being an employee, the umbrella company can pay the contractor through the UK Pay As You Earn scheme. This means that after invoicing the agency for the time the contractor has worked and receipting the funds they receive, the umbrella company will process those funds through PAYE.

On behalf of the contractor, umbrella companies will pay HMRC any income tax and national insurance contributions due on the contractors work, in turn sending the net funds (i.e. less tax & fees) to the contractor. All UK taxes and deductions (including the umbrella fee) will be detailed on a payslip.

The umbrella company make money by charging a fee for this payroll service. In return for the umbrella company fee, the umbrella will also provide the contractor with insurance that covers their work (professional indemnity & liability insurance) and statutory benefits like sick pay. Some umbrella companies will also provide enhanced benefits like discount vouchers.


An umbrella company is a company that exists to employ workers to fulfil short term contracts and pay their National Insurance and Income Tax. Unlike a normal employer, employees are not hired to fulfil a role, instead employees are potential self-employed workers who have won their own short term contract, and choose to become employees of the umbrella company so that the umbrella company can carry out their payroll in return for a small fee.

As a result, the worker is never classed as self-employed for tax purposes. In order to provide payroll services, the umbrella needs to act like a normal employer. They engage with the end client as a supplier, invoice the end client for the work, and pay their employee a wage through the PAYE system. Often there can be a recruitment agency in the middle of the end client and the umbrella company.

Because of the short term nature of their employment the employee remains in their own eyes (and that of their client) “self-employed”; even if technically they aren’t. They often have full control over their working patterns and holidays, with their employment by the Umbrella being largely passive.

In the past, large numbers of contractors had opted to open a Limited Company in order to engage with the client and pay their taxes. This was largely driven by the tax efficient way directors and shareholders could extract money from that company, boosting their take home pay.

However from 2017 the UK government cracked down on the use of Limited Companies through legislation commonly known as IR35.

In essence, this legislation required end clients using contract workers to define if their contractors were actually defacto employees. If they were, then the worker was deemed inside IR35 and would need to pay tax on all their earning through the PAYE system (which Umbrellas use as standard).

With penalties for getting their decision wrong, most employers blanket classed their workers as “inside IR35”, forcing tens of thousands of contractors to close their Limited Companies, and move to Umbrella Companies instead.

In response to the surge in Umbrella Companies on the market, various accreditations arose to help contractors distinguish between good and bad umbrella companies.

While these accreditations help contractors learn more about umbrellas, it’s important to remember that there is currently no official regulator of Umbrella Companies, meaning the accreditations on offer are currently private.

An accredited Umbrella Company is therefore an Umbrella that has undergone and passed an audit with a private regulator and promises to uphold their principles (which vary from accreditation to accreditation) in return for a fee.


As a contractor that’s been forced to move away from operating a Limited Company, towards using an Umbrella Company, it’s often not by choice that you would want to close your Limited Company.

The first choice of many is therefore to keep their Limited Company and make it dormant (where it doesn’t trade) in order to preserve it for when they find a contract deemed outside IR35.

In some instance though it is highly unlikely to be the case (for example you work in the public sector) and as such closing your company is the best route to take, simply to save yourself the burden of accountancy costs.

There are three main ways to close your personal services company in this scenario.

1. By far the cheapest method of closing your Limited Company is through dissolution – If you have no creditors, debtors or assets, you can make the company dormant for 3 months and then apply to have the company dissolved using a DS01 form or by applying for dissolution online.

  1. 2.If you have debtors, or assets within the company, and can pay off your creditors, then you will need to follow the formal liquidation process for a solvent company. This is called a Members’ Voluntary Liquidation.
  2. 3.If you have creditors that you cannot pay off before liquidating then you will need to follow the formal liquidation process for an insolvent company. This is called a Creditors’ Voluntary Liquidation. This is a common route taken by anyone with an overdrawn directors loan account.

If you’re caught by IR35, then you must process your contract value through PAYE. This means that the tax efficient payment methods available to directors and shareholders of a Limited Company are unavailable to these contractors.

Due to the cost of filing accounts, processing PAYE and time taken to invoice, most contractors will opt to find an Umbrella Company to process their payroll for cost reasons. Some end clients or agencies may even refuse to engage with a contractors Limited Company.

However in the event that an agency or end client will work with a Limited Company, provided they use the PAYE model, then you are able to use an accountant to process your payroll.

Most normal high street lenders will expect payslips as proof of income. This is a problem for many self-employed workers because they are not employees and therefore do not produce payslips.

There are however ways to enable self-employed workers to prove their income.

  1. Use an umbrella company for the months before you prove your income – with an umbrella company you will receive payslips, so planning ahead can enable you to easily prove your income.
  2. Prepare company accounts in advance – lenders will often require your most recent company accounts in order to assess your true income. If you need to prove your income, then it’s worth contacting your accountant to get your year to date accounts compiled.
  3. Find a specialist lender that will take your contract into account – some lenders will accept a copy of your contract as proof of income. This is because a signed contract will prove how much income before tax you are guaranteed.
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