An umbrella is simply a large company with a number of employees. The individuals engaged are not directors of the company nor are they shareholders or partners. The employees are entitled to tax free expenses as would be any regular employee. These expenses are offset against the money the employees generate for the company.


This consequently means that the way in which the employees are paid is slightly different to a normal employee.

The employees of an umbrella company receive their money via National Minimum Wage and holiday pay (which is typically paid ‘rolled-up’).
The umbrella company then takes a margin fee and the employee’s expenses are paid out. The remaining money is paid out as top-up salary. The top-up salary should however also be subject to holiday pay, tax, and National Insurance.

Why an umbrella


The benefit to the employee of using an umbrella company is that they receive their money in a tax efficient way.

The types of individual that will see the greatest benefit tends to be the individuals that earn over £10 per hour (as National Minimum Wage and holiday pay will always have to be paid). It currently offers a viable alternative to self-employment (particularly where an agency sits in the chain) due to S44 ITPEA (2003) changes in April 2014.

The umbrella company generates their revenue by retaining profit from the services provided by the individuals, this is typically a fee charged every time a payment is processed.

Contracts for Services


The contract between the umbrella company and the agency or client should be a contract for the provision of services. There is no definition of a contract for services and the courts have been left to interpret the meaning. Case law dictates that for the contract to be one for services there must be a lack of personal service, a lack of control and a lack of mutuality of obligation.

The contract must also not be for the provision of payroll services. An umbrella company is not a payroll bureau. It undertakes more than merely processing payroll. It has employees for a start. If your contracts imply you are a payroll bureau, than by rights, the employees should not be claiming any tax free expenses.

The contract should not be a contract for the provision of people. If the contract is for the supply of people, HMRC will consider it to be an agency contract. If the contract is deemed to be an agency contract the workers will be considered agency workers and are therefore not entitled to claim the same tax free expenses as employees.


The contracts between the umbrella company and the agency/client should not relate to specific individuals. The contracts should cover the services provided by the umbrella company. If the contracts do name individuals, it will look like the supply of people.


MSR Umbrella Step by Step guide





Are you are aware; IR35 is a piece of tax legislation introduced by the government and aims to change the way the flexible workforce pays taxes. HMRC discussion and consultation; the proposed changes to the IR35 regime will now be introduced on 6th April 2017 for the public sector.

If you currently work through your own personal service company (PSC) the changes that have been made to the IR35 legislation are likely to impact your take home pay and we want to ensure you are aware of this.



Please contact us before signing to any new contract with the agent.

We are offering a new payroll solution for you. Our new solution will also give you greater visibility of all your pay through a dedicated team.

Rest assured, all of our solutions are 100% compliant with current UK tax legislation.


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