An umbrella company acts as an employer to independent contractors who work under a fixed-term contract assignment, usually through a recruitment agency. Under this arrangement, the recruitment agency is able to reduce potential liability. Umbrella companies issue invoices to the recruitment agency (or direct to an employer).
In the early 1990s, there were just a handful of umbrella companies, whereas now there are around 150 providers competing in a market worth approximately â‚¬2.30 billion (â‚¬2.79 billion, $3.54 billion). The top five companies represent approximately 48 percent of the total umbrella market measured by sales. While the market is young, it is already relatively well-consolidated.
Umbrella companies are a convenient method to deal with independent contractors, as there were 1.4 million independent contractors working in the United Kingdom in 2008 alone, who contributed â‚¬82 billion (â‚¬172;100 billion, $126 billion) to the U.K. GDP, according to the Professional Contractors Group. This number has been growing and these contractors are employed across a range of industries.
Employers prefer to go through an umbrella company as they are not then held liable for any tax the contractor could be deemed to owe in the event of a misclassification. Further, any confusion over status of the employee is removed as the contractor becomes the employee of the umbrella company. There are advantages in store for the contractor, too, as these companies are responsible for ensuring the contractor is correctly taxed.
Contractors are paid through PAYE (Pay As You Earn, a method used to determine the tax and national insurance contributions due on the weekly/monthly earnings), and are able to offset some of their income through claiming expenses such as travel, meals, and accommodation.
So if you are thinking of using contractors in the United Kingdom, going through umbrella companies is one way to proceed.
For more information you can go to www.umbrellacompanies.org