Umbrella company
Third-party employer used by UK contractors who don't want to run their own limited company. The umbrella employs the contractor, deducts PAYE/NI, and invoices the end-client.
An umbrella company sits between the contractor and the end-client (or recruitment agency). The contractor becomes a PAYE employee of the umbrella; the umbrella invoices the client at the agreed day rate, deducts taxes, and pays the contractor a net salary minus a weekly or monthly margin (typically £15-£30/week).
Umbrella companies became popular after the IR35 reforms (April 2021) when many clients refused to engage limited company contractors directly to avoid IR35 risk. They simplify admin for the contractor (no accounts, no corporation tax) but eliminate the tax efficiency of a limited company.
Watch out for "tax avoidance schemes" disguised as umbrellas — HMRC has cracked down hard on offshore loan schemes that promised inflated take-home rates.
- Contractor becomes a PAYE employee of the umbrella, not the end-client
- Take-home is typically 60-65% of the day rate after taxes and margin
- Margin: usually £15-£30/week — flat fee, not a percentage
- Avoid any scheme promising "85%+ take-home" — almost always tax avoidance