The difference between an umbrella company and a recruitment agency

During the course of the last year, both contractors and businesses have sought ways to overcome the difficulties caused by the revised IR35 off-payroll legislation. And working with third parties has proven useful.

But it has led to some confusion about what services contractors can expect from different contractual parties, including the difference between recruitment agencies and umbrella companies, writes Kris Simpson, country manager of Cool Company.

So, what is the difference between an umbrella company and a recruitment agency?

What does a recruitment agency do for contractors?

In short, a recruitment agency finds roles for contractors. So, they match the contractor's skills to the opportunities that their business clients are searching for. They will usually conduct interviews and check references. Then, when a business takes on a contractor through the agency, the agency will receive a fee.

What does an umbrella company do for contractors?

Umbrella companies provide a payroll solution. For businesses, this means that they can outsource many of the important functions for all their contractors through an umbrella company and largely forget about the need to manage payroll, the associated HR, and doing so mitigates the hassle of IR35.

For contractors, safe in the knowledge that IR35 isn’t a consideration, they can focus on their work for the client and ensuring they are look after by their umbrella – their employer.

Indeed, using a bonafide PAYE umbrella company means that a contractor (as the umbrella company’s employee) gains access to the benefits associated with traditional employment, such as sick pay and paid holidays.

It also means that their contributions – tax, National Insurance – are directly deducted from their income, removing the need for an independent self-assessment tax return to HMRC, unless they have expenses that they wish to claim, or if they conduct other contract/freelance work outside of the umbrella company.

Can you work with both an umbrella company and a recruitment agency?

Many recruitment agencies only work with contractors working via umbrella companies. And some recruiters will want you to use only the umbrella companies listed on their Preferred Supplier Lists. While the topic of PSLs (and their pros and cons) is beyond the scope of this article, there are also Approved Supplier Lists.

Such ASLs can be a good thing for contractors in the instance that they have an umbrella already and want to stick to that umbrella, as they can put forward their umbrella to the agency for potential inclusion on the ASL. Assuming the agency does give its approval to the umbrella of course! Be aware, there are compliance hoops which the agency will want the umbrella to jump through.

The other issue is IR35, or more specifically the implementation of the revised IR35 legislation of April 2021. Broadly considered to be complicated, IR35 has become more difficult for businesses to successfully navigate. Consequently, a large number of businesses unable to employ a dedicated IR35 compliance team, simply ceased to work with limited company contractors.

By instead working with contractors utilising an umbrella company solution, recruitment agencies are able to more quickly support their business customers to ensure they don’t miss out on contract talent, or get bogged down in IR35 compliance. With umbrella companies handling payroll and other associated admin, the clients of recruitment agencies should in theory need worry only about processing the invoices, which they pay to the umbrella company. The idea being the umbrella company manages everything else! 

Final thought

Recruitment agencies and umbrella companies serve very different roles for both contractors and businesses. They can be used independently or together, but that are not to be confused! Yet they are both there to support you as you carry out your contractor career.