Recruitment agencies often use umbrella companies to pay temporary workers. HMRC confirms that there is no statutory definition of an umbrella company and currently describes it as 'a company that employs temporary workers who work for different end clients', where 'the umbrella will enter into a contract with a recruitment agency that will source work from end clients'. (Tackling non-compliance in the umbrella company market – Consultation).
In effect, umbrella companies act as middlemen employing individuals temporarily who agree to provide their services to end users. Following the clampdown on the use of personal service companies under IR35, the number of umbrella companies has increased. By having an umbrella company which employs the individual and accounts for income tax and National Insurance contributions, IR35 is effectively no longer relevant.
The supply chain works by the client who needs a temporary worker contacting a recruitment agency to find that worker. The recruitment agency pays the umbrella company the assignment rate and the umbrella company employs the worker paying earnings through PAYE, making deductions for the umbrella company's overheads such as:
- its administration fee (called 'a margin')
- an amount to meet their employer’s NIC
- holiday payments
- allowable expenses
- other amounts to cover other specific costs, e.g. apprenticeship levy.
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