Umbrella company: How does it work?

Working as a freelancer means choosing how you want to structure your activity. For many contractors, umbrella companies offer a simple way to keep the freedom of freelance work, without the burden of running a business on your own. Acting as an intermediary, the umbrella company employs you, handles payroll and tax deductions, and manages the administrative side of your assignments. So, what exactly is an umbrella company? How does it work? What are the advantages, and how do you get started? Let’s take a closer look at why choosing an umbrella company might be a good option for you.

How do umbrella companies work? 

Definition and purpose of an umbrella company 

An umbrella company is an intermediary that allows independent workers to carry out assignments for different clients while benefiting from the legal status and protections of an employee, such as holiday pay, sick pay and maternity or paternity pay. 

Rather than contracting directly with your clients, you become an employee of the umbrella company. The umbrella company invoices your end clients for the work you do, collects the payments and pays you a salary. Your pay is processed through the PAYE system (Pay As You Earn), with Income Tax and National Insurance contributions deducted in line with UK rules.

Umbrella companies are widely used in the UK, especially by freelancers who want a secure employment framework while keeping the flexibility of independent work.

How does the contractual relationship work?

Working through an umbrella company usually involves three or four parties: you as a freelancer, your end client, and the umbrella company (in some cases, a recruitment agency also plays a role by introducing you to the client).

You sign a contract of employment with the umbrella company. This contract sets out your employment rights, the terms under which you work and how you will be paid. At the same time, the umbrella company signs a separate agreement with your end client (or, where applicable, with the recruitment agency), allowing them to invoice for the services you provide.

On a day-to-day basis, nothing changes in the way you work with your client. You continue to work directly with your clients, manage your assignments and organise your time. You simply submit timesheets or work records to the umbrella company, usually approved by the client or agency. Then, the umbrella company handles the administrative and payroll side. It collects the payments from your clients, applies the correct tax and National Insurance deductions, and pays your wage. 

Payment and Payslips 

Once your end client (or the recruitment agency acting on their behalf) has paid the umbrella company for your work, the umbrella processes your income using the PAYE system, just like any other UK employer. They calculate Income tax, National Insurance contributions, paid holiday, and other statutory employment costs before issuing your wage. 

You receive a detailed payslip each time you are paid. This document breaks down how your client’s payment has been allocated, including the umbrella company’s administration fee, employment costs, and the deductions required by law. Your final take-home pay is shown clearly, making it easier to understand how your salary is calculated.

Payments can be made weekly or monthly, depending on the umbrella company’s policy and the terms of your employment contract.

How to get started with an umbrella company ? 

Why work with an umbrella company? 

Avoid being caught up in IR35 

The IR35 rules are designed to determine whether a contractor should be taxed as an employee or as a self-employed worker. They were introduced by the UK government to prevent what is known as “disguised employment”. The aim is to ensure that individuals who work as employees, but operate through their own limited company, pay broadly the same tax as employees. 

For many freelancers, understanding and applying the IR35 rules can be complex. When you work through an umbrella company, IR35 is no longer something you need to manage yourself: as an umbrella employee, you are paid through the PAYE system, with Income Tax and National Insurance contributions deducted at source. This removes the risk of incorrect status determinations and unexpected tax adjustments later on. 

Get all of the benefits of being an employee 

Working through an umbrella company means you are employed under a PAYE contract. This status gives you access to statutory employment rights and benefits that are not available to self-employed contractors. These include holiday pay, statutory sick pay, parental leave entitlements and enrolment into a workplace pension.

You are also paid through PAYE, with Income Tax and National Insurance contributions deducted correctly. You continue to work as a contractor in practice, while benefiting from the legal protections that come with employee status.

Savings for your retirement 

Using an umbrella company also means that pension contributions are handled as part of your employment. In the UK, employers are legally required to offer access to a workplace pension and contribute toward it. This is why most umbrella companies handle enrolment on your behalf after 12 weeks at the latest, provided you meet the eligibility criteria (earning at least £10,000 per year, working in the UK, being aged between 22 and State Pension Age, and being classed as a “worker”). 

Pension contributions are deducted directly through payroll and shown on your payslip, alongside your salary. If you prefer not to join the scheme, you usually have the option to opt out. However, for many freelancers, this setup offers a straightforward way to save for retirement without having to manage a pension independently.

Flexibility of work 

Working through an umbrella company does not interfere with your day-to-day activity or professional choices. You remain free to choose your clients, select your assignments, and negotiate your rates. 

This flexibility makes umbrella companies a suitable option for freelancers who want to move between projects or work with different clients over time, without having to set up and manage a limited company. Umbrella companies allow you to keep the freedom of freelance work while the administrative and legal side is handled for you.