Umbrella Companies Explained: FAQs for Contractors

Whether you're newly self-employed or an experienced contractor, there'll be aspects that you need more information on when you're deciding if working through an umbrella company is right for you.

To help you along, we've compiled a list of FAQs that contractors often ask:

How do I choose an umbrella company?

There are several key factors you should consider when choosing an umbrella company. These include:

• Fees
• Quality of service
• Speed
• Industry reputation
• Testimonials
• Compliance and qualifications

We've elaborated on these factors in further detail, and shared a list of questions you should ask in our guide to umbrella companies.

What's the process for joining an umbrella company? And how do I leave one?

Joining an umbrella company is fairly simple—you'll need to complete their registration process, after which they'll set up your account. In most instances, your account set- up will be completed with 24 hours.

You'll be asked to provide the following information or documents during your registration:

• Full name
• Date of birth
• Residential address
• Contact information
• National Insurance Number and National Insurance Code
• Tax code
• Bank or building society
• Bank account number and sort code
• Your rates
• Student loan information
• Starting date for your contract

You'll have to notify your provider when you want to leave your umbrella company. They'll then issue you a P45 form.

What rights am I entitled to as an umbrella company contractor?

You’re essentially considered an employee of the umbrella company.

While you won’t be entitled to employment rights with the end client, your umbrella company should provide the full range of employment rights that any other employed person is entitled to. 

These include: 

• Comparative pay
• Statutory benefits, such as sick pay, holiday pay and maternity pay
• Auto-enrollment into a workplace pension
• Performance-related bonuses, overtime payment and shift allowances 
• Paid time off for antenatal appointments

The Agency Worker Regulations (AWR) will apply when you’ve worked for a company after 12 weeks in the same role. Under the AWR legislation, you’re entitled to the same basic terms and conditions as if you had been recruited directly by the hirer.

What is an overarching contract of employment?

As an umbrella company contractor, you’re required to sign an overarching contract of employment with the umbrella company. 

This is a type of employment contract that links together a series of separate assignments. The contractor becomes a permanent employee of the company, and the company provides continuity of employment during and between different contracts. 

This contract enables the umbrella company to pay the contractor like an employee; you’ll be paid through PAYE, and tax and National Insurance contributions will be deducted at source. It also allows the contractor to enjoy the rights of an employee.

What expenses can I claim as an umbrella company contractor?

There are several types of expenses you can claim for:

• Client billable expenses
• Business costs
• Non-client billable expenses

If you're deemed to be under SDC, you can't claim tax relief on home-to-work travel and subsistence expenses.

We've explained these in further detail in our guide to claiming umbrella company expenses.

Do I need my own business insurance as an umbrella company contractor? 

Compliant umbrella companies will provide its employees with three types of business insurance: 

1. Employer’s liability: 

Employer’s liability insurance is designed to cover workplace injury or property damage claims made by employees during the course of their work. Any company that has employees is legally required to hold employer’s liability insurance.

2. Professional indemnity: 

Professional indemnity insurance covers risks in association with your professional services. For instance, if you’ve made a mistake in the course of your work that results in financial losses for the end client, they may make a legal claim against you. 

Professional indemnity insurance will cover the damages you’ll need to pay, as well as the legal costs you incur. Additionally, the insurance will cover breaches of confidentiality, loss of data or documents or cases of defamation. 

3. Public liability: 

Public liability insurance covers your interactions with third parties. 

If you cause an injury or property damage to a member of the public during the course of your work, public liability insurance will cover you for the resulting legal and compensation costs.

While umbrella companies aren’t legally required to hold professional indemnity and public liability insurance, there will often be a contractual requirement for these types of coverage. 

Do I get workplace pension? 

As an employee of the umbrella company, you’ll be automatically enrolled into a workplace pension scheme as long as you meet the following criteria:

• You’re classed as a worker
• You’re aged between 22 years old and the the State Pension age
• You earn more than £10,000 per annum
• You usually (‘ordinarily’) work in the UK

Can I opt out of my workplace pension scheme? 

You can opt out only after you’ve been auto-enrolled into your workplace pension scheme. This means that you’ll need to wait until you receive a notification from your umbrella company on how and when you can opt out, before you can proceed to do so.  

What other private pension schemes may I consider?

There are a number of private pension schemes you may consider. These include stakeholder pensions and self-invested personal pensions (SIPPs). 

What is the 24-month rule, and how does it apply to me? 

The 24-month rule, also referred to as the two-year rule, enables contractors to claim travel expenses from their home to a client’s office, as long as it is classed as a “temporary workplace”. 

The following conditions must apply for a work location to be classed as a “temporary workplace”

• The period of engagement is less than 24 months
• The contractor should spend less than 40 percent of their time at the workplace

Essentially, if you work at the client’s office for more than 24 months, or spend more than 40 percent of your time at the location, it is considered a permanent workplace—and as such, you won’t be able to claim travel or subsistence expenses. 

Bear in mind that this is subject to the SDC legislation introduced in April 2016. Further elaboration on SDC can be found in our guide to claiming expenses as an umbrella company contractor.