What is an Umbrella Company?

The Simple Explanation

An umbrella company is a UK limited company that acts as your employer while you work on assignments for end clients through recruitment agencies. Instead of setting up your own limited company, you become an employee of the umbrella company — and it handles all your payroll, tax, NI contributions, and employment rights on your behalf.

In simple terms: the agency pays the umbrella company, the umbrella processes your pay through PAYE, and you receive a net salary — just like a permanent employee, but working on different contracts.

How Does an Umbrella Company Work?

Here's the typical chain of relationships:

1. 1
   End Client — The business where you physically work
2. 2
   Recruitment Agency — Finds you work and agrees a day/contract rate with the client
3. 3
   Umbrella Company — Receives the assignment rate from the agency, employs you, and processes your payroll
4. 4
   You — Work at the client's site, submit timesheets, and receive net pay

The key point: the umbrella company is your employer. This means they handle employer responsibilities — paying employer NI, providing payslips, auto-enrolling you in a pension, and ensuring your employment rights are protected.

Who Uses Umbrella Companies?

Umbrella companies are widely used by:

• IT contractors working on software development, infrastructure, and consulting projects
• Locum doctors and nurses working through NHS agency frameworks
• Supply teachers placed by education recruitment agencies
• Finance and accounting contractors
• IR35-caught contractors who previously operated via their own limited company
• Short-term or project-based workers who don't want the admin of a limited company

What Deductions Are Made From Your Pay?

Understanding your deductions is crucial. Unlike a permanent job, working through an umbrella company involves deductions at two stages:

Stage 1: From your assignment rate

• Employer's National Insurance (15% above £5,000 threshold)
• Apprenticeship Levy (0.5%)
• Umbrella company margin/fee

What remains is your gross salary.

Stage 2: From your gross salary

• Income Tax (PAYE)
• Employee's National Insurance
• Pension contributions (if applicable)
• Student loan repayments (if applicable)

Read our detailed guide on how umbrella pay is calculated →