Q&A: 2). What is an Umbrella Company? How Does it Work?
An umbrella company is a separate company that acts as an employer for contractors or agency workers and is an intermediary between the contractor or agency worker and the employment agency or end-client. The company does not find work for its employees and its principle function is to collect payment from the agency or end-client and pay it to the contractor or agency worker.
The umbrella company will have a business-to-business contract with the agency or end-client. The contractor will usually have an employment contract with the company that sets out their terms and conditions. As the umbrella company is the contractor’s employer, they will pay them for the work that they do for the employment agency or end-client and deduct tax, National Insurance Contributions, any pension contributions, and their fee from the contractor’s pay.
The contractor will submit their time-sheet to either the agency or the umbrella company, who in turn will invoice either the end-client or the agency. The agency will be paid less any fees they have agreed with the end-client. The umbrella company will be paid by the agency which will be the amount paid by the end-client and costs such as administration costs, employer’s National Insurance, employer’s pension contributions, holiday pay and other costs that may be incurred.
Contractors working through this arrangement will normally be paid a set contract rate which should be set out in the employment contract. This will be gross pay and should be at least equal to the National Minimum Wage for the contractor’s age.
The contractor should be given key information from the umbrella company which sets out a breakdown of costs including the rate received for the assignment by the umbrella company from the agency. The company’s costs, and employer’s National Insurance should be deducted from the umbrella company’s assignment rate, not from the client’s contract rate.
The contractor should receive a payslip detailing hours worked if pay varies depending on hours, gross pay, deductions which have been made and net pay.
Umbrella companies can be seen as a “hassle-free” way of contracting. For more information click here
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