Understanding Umbrella Companies

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Villains guilty of exploiting workers.  Middle-men pirating off the backs of professionals.  It might come as a surprise if you are using one, but these depictions are being used to describe the typical Umbrella, and we’re asking – are they really fair?

Normally the charges against brollies are vague or reported without challenge.  But if there are specific allegations, they usually focus on the brolly deducting Employer’s National Insurance and holiday pay from users’ wages.  Both of these are wholly legal deductions.

If one wants examples, BBC Yorkshire has composed an article that unhelpfully stirred the pot and supply teaching agency Protocol produced criticisms of umbrellas in the guise of a guide. 

These pieces almost always treat umbrella companies as nothing more than outsourced payroll and, in doing so, they’re falling for – or seeking to exploit – a common misunderstanding about umbrella pay.

How an Umbrella Company Works

Specifically, they misrepresent the charge out rate – this is the amount paid by the agency or client to the umbrella company, and the employee’s gross pay rate – this is the amount paid to the employee before deductions for tax and Employee National Insurance. 

To help clear up any misunderstandings speedy has compiled a guide to how an umbrella actually works. 

  • The umbrella company employs the worker
    • o The worker becomes a permanent employee and has all the rights and protections
  • The agency or client pays the umbrella company a charge out rate for the contractor’s time.
  • This rate, by law has to include the contractor’s pay, the umbrella company’s profit margin and costs of employing the worker.
  • These costs are not singular – they should include employer’s national insurance, the apprenticeship levy, company pension contributions and holiday.
  • The umbrella company takes their margin, which is their income from charging ut their employee’s time.
  • This is how umbrella companies fund their business – including the cost of insurances and statutory payments like sick pay and maternity pay.
  • Typically an umbrella margin will be between £20 and £30 for a weekly payment.
  • The umbrella company pays the worker through a PAYE process, exactly like any other employer would

As can be seen from above the umbrella model is similar to that used by other businesses. For example were you to hire a solicitor who charges £200 an hour, this would not be what the solicitor realistically earns.  The solicitor’s legal practice charges £200 an hour and pays their employee less than that – having covered the costs of running their business. 

If the situation however is that simple where has all the confusion about the role of the umbrella company come from?

One possible reason is the lack of resources available to make sure newcomers to umbrella companies understand exactly what’s happening. Some people clearly do not understand what they are signing up for, and how pay is calculated. 

Often contractors will be given a choice of two rates; an agency PAYE rate, which is the rate that would be paid directly to the contractor through the agency’s in-house payroll and an uplifted ‘limited company’ rate, which is the charge out rate the agency would pay to another business, for example an umbrella company. 

The agency PAYE rate will be the lower of the two, as it doesn’t include an uplift for the umbrella’s margin and costs. 

The lower, PAYE rate is the contractor’s pay rate so it wouldn’t be unreasonable to assume that the uplifted rate is as well.  If appropriate care is not taken, it may not be clear to the contractor that the uplifted rate is the charge our rate, rather than their pay.  This can leave them with  unrealistic expectation and they will feel understandably aggrieved when they discover the truth.  A good umbrella company will put considerable effort into ‘on-boarding’ new contractors, making sure their questions are answered and checking their understanding, to avoid confusion. 

Further Charges

Another accusation against umbrella companies is that they offer no benefit to the contractor.  Umbrellas are accused of being greedy middle-men, taking profits out of the supply chain and bringing nothing of value to it. 

Those making this claim treat umbrella companies as offering nothing more than outsourced payroll, which is some distance from the truth.  Umbrella companies offer full employment, including all the associated rights and protections, often to workers who would otherwise not have them.  They also offer confidence that tax and national insurance have been calculated and paid correctly.  This provides a safe route into contracting for people who would otherwise not consider it, increasing the range of skills available to UK companies. 

The payroll industry is of course not free of bad practice and exploitation.  A long history of chaotic legislation and sparse enforcement has allowed rogues to emerge, and though in general things are much better than they were, some do still survive. 

It is a shame to see umbrella companies maligned constantly in the mainstream press – particularly when the route is often a failure to understand what they do.  We hope we can help clear up people’s understanding even a little bit.  

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