The umbrella company will invoice the agency or the client that you are working for each month according to the timesheets that you supply. The client who you are working for (or the employment agency) pays the invoices directly to the umbrella company.

They then pay your wages after the deduction of income tax, national insurance and any other necessary deductions. They will deal with HRMC and any other bodies that need paying.

Umbrella companies use the PAYE tax rules for the purposes of deducting tax and national insurance. They can also offer benefits schemes to the contractors.

This offers great flexibility to companies who wish to increase their staff but do not want to take on someone full-time. The contractor uses the umbrella company as an employer. This removes a lot of the paperwork and worry of tax returns for the contractor. Contracts are drawn up between the umbrella company and the client or employment agency.

The umbrella company is able to assist the contractor with claiming money back for things such as travel, accommodation and food. They have specialist employees, such as accountants, to be able to deal with this efficiently.

Some employment agencies may have the ability to process wages and invoices and therefore they do not require an umbrella company. However, a lot of employment agencies do not have the staff or the ability to cover these areas and only act as a “placement” agency; in this case, an umbrella company may be very useful.

Most UK umbrella companies work on a fixed fee for their services. Others work on a percentage of the amount they invoice. The contractor can usually adjust their charges to allow for the extra money that the use of an umbrella company incurs.