# Umbrella Company

> An umbrella company is an intermediary that employs contractors and pays them through payroll on behalf of recruitment agencies or end clients, most commonly in the UK, acting as the legal employer for tax purposes while the contractor works on assignments the client directs.

An umbrella company is an intermediary that employs contractors and freelancers, most commonly in the UK. Rather than working through their own limited company or as a sole trader, the contractor becomes an employee of the umbrella company, which then supplies their services to end clients, usually through a recruitment agency.

The umbrella company acts as the legal employer for tax and National Insurance. It runs the contractor's pay through PAYE, the UK system for deducting income tax and National Insurance at source, and provides statutory employment rights such as holiday pay. The end client directs the actual work on each assignment.

The umbrella model has drawn regulatory attention in the UK, especially after the IR35 reforms of 2021 pushed more contractors towards it. Compliant umbrella companies must operate PAYE properly and cannot offer arrangements that disguise pay to avoid tax, which sit outside the law.

## How does an umbrella company work?

A contractor becomes an employee of the umbrella company, which employs them across their assignments. The umbrella receives payment for the contractor's work, usually via a recruitment agency, then pays the contractor through payroll after deducting income tax and National Insurance under PAYE. The end client directs the work but is not the employer.

## Is an umbrella company the same as an Employer of Record?

They are related but not the same. Both employ workers on behalf of another business. An umbrella company is a UK-focused model that employs contractors on assignments, usually through an agency. An Employer of Record employs staff you have chosen in countries where you have no entity, and is built around cross-border payroll and compliance.

## Key facts

- **New UK PAYE liability rules for umbrella workers:** From 6 April 2026, UK recruitment agencies, or end clients where there is no agency, become jointly and severally liable with umbrella companies for PAYE income tax and National Insurance on umbrella workers' pay. (Source: Grant Thornton UK, verified 2026-07-28)

## Umbrella company vs EOR

|  | Umbrella company | EOR |
| --- | --- | --- |
| Main market | Mainly UK contracting | Cross-border employment |
| Who it employs | Contractors on assignments | Staff the client has chosen |
| Usual chain | Client, agency, umbrella, worker | Client and EOR |
| Built for | PAYE employment of contractors | Payroll and compliance across countries |

## Frequently asked questions

### Why do contractors use umbrella companies?

Umbrella companies offer a simple way for contractors to be paid as employees without running their own limited company. The umbrella handles payroll, tax and National Insurance under PAYE and provides statutory rights such as holiday pay. Many contractors moved to umbrellas after the IR35 reforms made working through a personal company less attractive for some roles.

### Are umbrella companies compliant?

Legitimate umbrella companies operate PAYE correctly and pass on the right tax and National Insurance to HMRC. The sector has faced scrutiny because some schemes disguised pay to reduce tax, which is not lawful. From 6 April 2026, new rules make others in the supply chain jointly liable for unpaid PAYE, tightening compliance further.

### What is the difference between an umbrella company and an EOR?

An umbrella company mainly employs UK contractors on agency assignments and runs their pay through PAYE. An Employer of Record employs people you have chosen, often in other countries, and takes on local payroll, tax and employment compliance. Umbrella work is a domestic contracting model; an EOR is built for cross-border hiring.

## Sources

- [Umbrella company reforms 2026: what businesses need to know](https://www.grantthornton.co.uk/insights/umbrella-company-reforms-2026-what-businesses-need-to-know/), Grant Thornton UK

_Last updated 2026-07-28. Reviewed by Teamed's in-house employment-law team. Source: https://www.teamed.global/glossary/umbrella-company_