An umbrella company acts as an employer to independent contractors; the independent contractors then work under temporary assignment contracts for end clients, often through recruitment agencies.

The main difference between operating via your own limited company and under an umbrella is your employment status. Operating your own limited company, you are a director and can take advantage of a variety of methods for minimising your exposure to tax – provided you are willing to take full responsibility for your financial affairs. Working via an umbrella, you are an employee and therefore the umbrella manages your PAYE and National Insurance contributions. Hence, while you retain much of the flexibility in being able to set your own working conditions that contracting offers, the bulk of the paperwork and back-office administration is carried out for you.

As an umbrella contractor, you would have an employment contract with the umbrella, and the umbrella holds the assignment contract with the recruitment company or end client. The employment contract and associated operating procedures; when drafted and implemented correctly, create a style of employment commonly known as overarching employment. Where overarching employment exists it allows scope for qualifying workplaces to be assessed as a series of temporary workplaces, thereby allowing travel and subsistence expenses to be reimbursed as tax free expenses; subject to other conditions being met. (See our expense guide for further details)

Umbrella companies are used by many contractors as they provide a simple cost effective operating structure. There are no joining fees, no leaving fees and you only pay the umbrella charges whilst you are on active contract. An umbrella company provides you the legal status of an employee and because you're employed you will still have access to state benefits such as a state pension and maternity pay. Join us today and become a Contracting PLUS employee.

As a Contracting PLUS employee we do all your invoicing, chasing and collection of payments from your agency or end client and calculate your tax and NI contributions at source. We also provide you advice on which business expenses you can legitimately claim.