What is Umbrella Pay?

What is Umbrella Pay?

Umbrella pay refers to when temporary workers are employed by a third party known as an umbrella company, instead of directly by the organisation or organisations they work for. Freelancers and contractors commonly rely on umbrella companies for short-term work, as it enables them to hand over the administrative burden of invoicing and accounting to the umbrella company.

Umbrella companies process a worker’s payments and carries out the tax and National Insurance deductions. Umbrella companies generate income by taking a fee for their services from the worker’s monthly payments.

What is Umbrella Pay vs in-house payroll?

In-house payroll is a direct employment model where employee payment is managed internally, while umbrella pay is managed through a third party, such as a recruitment agency.

Employers operating an in-house PAYE model are responsible for calculating and deducting taxes and National Insurance, as well as sending them to HMRC. With an Umbrella Company, the employer only needs to send the employee’s gross salary to the umbrella company, who will then be the party responsible for making the necessary deductions, as well as sending the deductions to HMRC, net pay to the employee, and taking their own fee.

Some recruitment agencies also operate as PAYE agencies. This means that candidates are technically employed and paid by the same umbrella company via standard PAYE methods, even though they are producing work for another organisation. It’s important for employers to note that PAYE agency workers are entitled to standard workers’ rights after 12 weeks of employment, though this does not apply to contractors working through an umbrella company.

Benefits of Umbrella Pay

For the employer:

Reduced administrative burden 

Outsourcing payroll processes to an umbrella company significantly reduces the workload for an organisation’s in-house payroll team.

Flexibility

Umbrella companies enable organisations to quickly add or release temporary workers without the admin associated with traditional employment arrangements, enabling them to adjust quickly to busy or quiet periods.

Cost savings 

By leveraging umbrella payroll services, businesses can reduce workload for their in-house payroll team and empower their in-house to dedicate all of their focus to the organisation’s permanent, full-time employees.

Compliance 

Umbrella companies ensure that all payroll-related obligations are carried out in accordance with HMRC guidelines, providing the employer with peace of mind.

For the employee:

Continuous employment

Even if a temp worker works across multiple companies, as long as they are under the same umbrella company this counts as continuous employment, which can be positive for workers who may be interested in a mortgage or other similar financial arrangements.

Benefits

Workers under umbrella companies are entitled to holiday pay and statutory benefits such as sick pay, parental leave, and pension contributions. Some umbrella companies also offer similar perk schemes to traditional employers.

Simplified finances

As umbrella companies take care of taxes, this allows their workers to reduce their risk of non-compliance which may increase if they attempted to carry out these tasks themselves.

Learning & Development

Some umbrella companies offer L&D programmes, so that their workers can still access the career progression and upskilling that they may have otherwise missed out on by not being a permanent employee with one company.

Cons of Umbrella Pay

For the employer:

Non-compliance

Some umbrella companies have been known to operate tax avoidance schemes. Therefore, any umbrella company must be carefully vetted. Some recruitment agencies will have a handful of their preferred umbrella companies, who they have worked with before and trust. This may be a viable method for reducing the risk of HMRC non-compliance.

Relationship Management

While the use of an umbrella company pay reduce one side of your admin, work will still be required to maintain proper communications with the umbrella company your organisation engages with.

Extra Costs

Umbrella pay can enable an organisation to cut in-house costs, but umbrella companies will still require a fee for their services. Therefore, while this may still be an arrangement that generates strong ROI for some organisations, for others, the cost-savings may be limited.

For employees:

NI Contributions

The employee had to cover the cost of the employer NI contributions when they are working under an umbrella company.

Misleading Numbers

Some umbrella companies have been known to mislead workers by inflating the amount of money they suggest the worker could earn under them, such as by presenting that pay as if the working is working 365 days a year.

They have also been known to inflate tax codes to get workers to come under their umbrella company, which can result in a fine from HMRC for the worker.

There were also recent changes to how expenses are paid out to temp workers. The SDC ensures fair practice, but some umbrella companies may attempt to claim otherwise.

Due to the above, it’s crucial to vet an umbrella company as thoroughly as possible if you are considering engaging in a professional relationship with them.

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