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How contractor umbrella companies operate

Published on Jul 2, 2009 |

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Before embarking upon a career as an IT contractor, one of the first things you need to do is decide whether to contract via your own limited company, or via an umbrella company.

There are positive and negative reasons for selecting either structure to work under. You can find out more in our start-up guide: limited company or umbrella.

If you have chosen to join an umbrella company, most PAYE schemes operate in the same way. In this article, we outline the typical steps you will follow as an umbrella company employee:

How an umbrella company operates

1. You sign up to become an employee of an umbrella company scheme (read our leading guide to choosing an umbrella company).

2. Once you have found a contract role, the umbrella company signs a contract with the contractor recruitment agency, or end user.

3. You will typically sign an employment contract with the umbrella company, and will need to provide them with your P45/P46 and other essential information.

4. You submit your timesheets (often online these days) and any expenses claims you may have (typically on a weekly or monthly basis).

5. The umbrella company will invoice your client / agency for the hours or days you have worked.

6. The recruitment agency or client settle the invoice with your umbrella company.

7. The umbrella will pay you your salary, typically weekly or monthly, net of PAYE (income tax) and NICs (national insurance contributions). They will also deduct their fee and any other sums you have pre-agreed. They will also reimburse any allowable expenses.

8. You will receive a payslip detailing your salary, expenses and all deductions.

Further information

We have dozens of guides to help you find out more about working via an umbrella company, how to choose a scheme, and what to look out for:

- Limited company or umbrella?
- How to choose the best umbrella company
- How to join an umbrella scheme
- Guide to umbrella company fees
- Our directory of umbrella companies