Contractors in Great Britain have a number of unique tax structures and tax solutions open to them. One of these numerous tax solutions that the contracting sector use (alongside others such as Managed Service Companies and Limited Companies) is an umbrella company. An umbrella company is a company formation that offers a base ‘pay when you play’ system of payroll management for contractors, freelancers and consultants in Britain, so they are able to work using their own company but not through PAYE or an agency.
Broken down to basics, umbrella companies essentially operate as vessels for managing all of the boring administration and paperwork that can accompany working freelance, and in doing so they allow contractors to work their contracts unmolested. Instead, the umbrella company will act on their behalf, and will send off invoices, chase up and collect payments from clients and agents, as well as calculating the contractor’s tax burden and then transferring out the final, adjusted payment to the contractor’s bank account.