How Umbrella Companies Work and Are They Worth It?
If you work through a recruitment agency, you may be offered the choice of being paid through an umbrella company. This guide explains what umbrella companies are, how they work, and whether they make sense for your situation.
What Is an Umbrella Company?
An umbrella company is an employment intermediary. Instead of the recruitment agency employing you directly, the umbrella company becomes your employer on paper. They receive your pay from the agency, deduct tax, National Insurance, and their fee, then pass the net pay to you.
How the Payment Chain Works
- You work at the client site through a recruitment agency
- The agency invoices the client for your work
- The agency pays the umbrella company
- The umbrella company processes your pay as their employee
- You receive your net pay after deductions
Deductions From Your Pay
An umbrella company will deduct:
- Employer's National Insurance — the employer's NI contribution (13.8% above the threshold). This is the most significant deduction and is sometimes passed to the worker
- Employee's National Insurance — your NI contribution (8% above £242/week in 2024-25)
- Income Tax — calculated through PAYE as normal
- Workplace pension — if you are auto-enrolled
- Umbrella margin — the company's fee, typically £15-£30 per week
- Apprenticeship levy — 0.5% of pay bill for companies over the threshold (sometimes passed through)
Umbrella vs PAYE Agency
If your agency offers direct PAYE employment, you will typically take home more than through an umbrella company. This is because:
- No umbrella margin/fee
- Employer's NI is borne by the agency, not passed to you
- Fewer intermediaries mean less room for hidden deductions