How do umbrella company arrangements work?

In an umbrella company arrangement, the worker is the only employee of the umbrella company, which is effectively interposed between the worker and the end user. The umbrella company manages invoicing, payroll and contract matters. As the “employer”, the umbrella company is responsible for deducting PAYE tax and national insurance, including employer’s National Insurance, from the worker’s pay packet.

The main aim of this arrangement is to shift liability for Employer’s National Insurance on to the worker.

The worker enters into a standard form written contract of employment with the umbrella company, but the umbrella does not source any work for the worker. Instead, the worker arranges temporary work, either through an employment agency or directly with a client. The umbrella company invoices the client for the worker’s services and handles pay and tax matters for the worker, in return for a weekly or monthly fee. The employment contract is “overarching”. In other words, the individual is allowed to work in different positions with different end clients. But the only income available to the umbrella company is the individual worker’s own wage packet.