How A Compliant Umbrella Company Works

The role of an umbrella company as developed by guidance from HMRC has become that of employer which means that the contractors who use their services are employed under a contract of employment and paid through PAYE.

The contractor will, typically, have sourced work through a recruitment agency or direct with a client before seeking the services of an umbrella company (the alternative for new contractors is to work through a Personal Service Company or PSC; what used to be known as a single person Limited Company). The umbrella company will liaise with the recruitment agency or client and will forward documentation such as copies of insurances (public liability, employer’s liability and professional indemnity), copy of a VAT certificate and a copy of their Certificate of Incorporation. They will then request a business to business contract from the recruitment agency or client which will contain schedule information for the assignment. At this point the contractor is engaged under a Contract of Employment with the umbrella company and provided with details of the assignment.

The chain of client, recruitment agency, intermediary (umbrella company) and contractor works as follows:


Client engages Recruitment Agency to fill a contract position for an agreed sum (A)


Recruitment Agency enters into a B2B contract with the intermediary for the sum agreed with the client less their retained margin (B)


Intermediary engages the contractor under a Contract of Employment for a salary equal to the contract value (as entered into with the agency) less Employer’s NI contributions less their margin (C)

When the contractor has finished his/her week’s/month’s work they will ask the client to sign a timesheet confirming the number of hours worked and the satisfaction that the work has been carried out to the required standard. The timesheet will then be sent to the recruitment agency who will raise an invoice to the client for the agreed contract rate (A). The client will then pay the recruitment agency for this invoice. The contractor will have also advised the umbrella company of his/her hours worked and they will raise an invoice to the recruitment agency for the contract rate (B). The agency will then pay this invoice. Upon receipt of funds from the agency the umbrella company will put aside its margin as well as the amount payable to HMRC for Employer’s National Insurance contributions, they will then process the contractor’s salary (C) through PAYE.All compliant umbrella companies operate what is referred to as an ‘over-arching’ Contract of Employment; this is to maintain continuity of employment. Without the over-arching contract the worker would be engaged on a series of fixed term appointments at permanent workplaces, as it is the worker is employed by the umbrella company and works for them on a series of temporary assignments.

Reasons For Choosing Us

Below are 10 reasons as to why you should chose to use Pendulum Contracting Services:

1.Transparent Financials – All umbrella employees are given a detailed financial illustration which shows what is received, charged or paid.  Being detailed with our illustrations also minimises any financial queries.

2. Employment Rights – As would be expected all umbrella employees receive full employment rights under their employment contracts. In summary this means that they receive all the usual benefits of employment whilst still remaining a contractor.

3. Pay – All umbrella employees will receive the national living wage rate where applicable, and payment is made for holidays and for statutory rights. This means that the individual receives income during statutory absences, such as annual leave, maternity/paternity leave.

4. AWR – All umbrella employees have their assignment pay either benchmarked or receive Swedish Derogation employment contracts. This means that the worker has the same basic pay and conditions as their permanent counterparts, or receives pay between assignments.

5. Insurance – All umbrella employees are covered by insurances both as employees and whilst on assignment. This means that there is cover in place should it be needed.

6. Pension – All umbrella employees are automatically enrolled in pension schemes compliant with auto-enrolment legislation. This is an important benefit of being employed, and we ensure it is being provided.

7. End of Employment – All umbrella employees receive the full entitlement notice pay whether under Swedish Derogation employment contracts or otherwise. This is an important benefit of being employed, and we ensure it is being provided.

8. Protection – We act as employer in Employment Tribunal claims. This minimises your risk.

9. Independent Audit – Umbrella companies are not subject to an independent audit however we are open to an independent audit from Aspire Partnership periodically to ensure we are operating compliantly.

10. Transparency on Audit – All audit report findings are shared with HRMC for full transparency. This means HMRC know exactly who our FSCA Accredited Members, i.e. which firms meet the standards set by the FCSA.

Still Unsure?

There are lots of other benefits to working alongside Pendulum Contracting Services, but if you’re still unsure and need to discuss the matter further than our team is on hand just waiting for your call.

Call 0333 0066 296 to find out more!