An umbrella company acts as a proxy for employment agencies in the UK, providing administrative functions and benefits to independent contractors. It eases the burden of setting up individual companies for contractors and allows agencies to focus on recruiting.
An umbrella company is a specific type of payroll processing in the UK. It works like a proxy for an employment agency so that independent contractors can enjoy employee benefits under the law. The term “umbrella” indicates that the company provides a specific administrative function for the benefit of certain related parties, protecting them from certain liabilities and expenses.
Usually, an employment agency is hired by a client to manage a project. The agency goes out and recruits independent contractors to work for the client. Under the typical arrangement, the independent contractor signs a contract with the agency or client that requires him to work on a temporary basis and pay all of his employment taxes without the benefits a full-time permanent employee would receive. To set up insurance, deduct business expenses, and receive certain tax benefits, the independent contractor must set up their own company and pay themselves as an employee rather than performing the contract in their own capacity.
If the employment agency manages a client project with 50 independent contractors, that is 50 separate companies that the contractors could set up to process their payments. This is cumbersome for both the agency and the contractors. An umbrella company is designed to ease this burden for both parties. It provides payroll services for the employment agency, but more importantly it serves as a substitute for all those individual companies that contractors normally arrange.
The employment agency awards the independent contractor contracts to the umbrella company. Umbrellas treat contractors like employees. They deduct employment taxes, provide benefits and insurance, and basically function as the employer providing employee services details to the agency which, in turn, provides them to the client. Functionally, the contractors submit their timesheets to the umbrella company, the company bills the agency, and the agency bills the client.
Using an umbrella company offers significant benefits to the independent contractor and agency. The contractor no longer has to worry about setting up and running a business. He gets all the same benefits as a regular employee while maintaining his flexibility as a contract worker. Additionally, he was awarded benefits for the entire umbrella workforce, rather than for an individual company. This ultimately gives the policyholder access to benefits that they otherwise could not afford.
The agency can focus on recruiting without worrying about processing wages for hundreds of separate entities. Most importantly, as umbrella employees, labor taxes are advanced from the contractor’s income. This eliminates the liability that the agency may perceive by paying workers as self-employed, as contractors are responsible for paying their own labor taxes. Contractors often neglect to make adequate tax payments, placing the entire employment chain under government control.
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