Umbrella company vs self-employed: who invoices whom?

The three common set-ups

How umbrella companies work

GOV.UK explains that an umbrella company is often used by recruitment agencies to pay temporary workers. In most cases the umbrella company employs you and pays your wages through PAYE. It doesn't find you work; the agency does. The usual flow is:

1. You send your timesheet to the agency (or the umbrella).
2. The agency charges the client.
3. The agency pays the umbrella company the agreed "assignment rate" for the time you worked.
4. The umbrella company pays you as your employer, after its own costs and the statutory deductions.

Because you're an employee of the umbrella, you don't invoice anyone. You get payslips instead. The umbrella's margin, employer National Insurance, employer pension contributions and the Apprenticeship Levy (where it applies) come out of the assignment rate before your gross pay is worked out, so your gross pay is lower than the headline rate. GOV.UK's "work out pay from an umbrella company" tool helps you check your payslips.

Key Information Document

If you find work through an agency, it must give you a Key Information Document (KID) before you agree terms. If an umbrella company is involved, the KID shows its name, the expected or minimum assignment rate, the deductions and your expected pay. Read it carefully and compare it with your first payslip.

The April 2026 umbrella company changes

From 6 April 2026, GOV.UK says that where an umbrella company employs workers, the agency (or the end client, if there's no agency) is responsible for making sure PAYE is operated correctly, and HMRC can recover underpaid PAYE from them. For workers, the umbrella is still your employer and must pay you correctly. The change is designed to tackle non-compliant umbrella schemes, so be wary of any arrangement promising unusually high take-home pay.

Self-employed through an agency

Some agencies engage genuinely self-employed workers directly, for example in construction under CIS, or in driving and logistics. You're running your own business, so you:

• invoice the agency (or the agency self-bills you);
• pay your own tax and National Insurance through Self Assessment (in construction, CIS deductions count as advance payments towards this);
• don't get holiday pay or sick pay; and
• keep records for at least 5 years after the 31 January deadline for the tax year.

Whether you're genuinely self-employed depends on the working relationship, not just the label: control, substitution, who provides equipment, and so on. GOV.UK has guidance on employment status, and HMRC's Check Employment Status for Tax (CEST) tool can help.

Your own limited company

Contractors working through their own company invoice the agency from the company. The invoice shows the company's full registered name. The off-payroll working rules (IR35) may affect how the agency or client treats payments, so get advice specific to your contract.

Which is right for you?

There's no single answer. It depends on how the agency engages workers, your employment status, the sector and how long the work will last. Umbrella employment means less admin and employment rights, at the cost of the umbrella's margin and employer costs being taken from the rate. Self-employment means more admin (invoices, records, Self Assessment) and fewer rights, but more control. If you're unsure, take independent advice before signing anything.

What a self-employed agency invoice looks like

For comparison with an umbrella payslip, here's a sole trader's weekly invoice to an agency. The agreed rate is £22.00 an hour, and the timesheet shows 40 hours.

The agency pays £880.00 in full (unless CIS applies because it's construction work). Nothing is deducted for tax, so the worker sets money aside for Self Assessment and has no holiday pay or employer pension. Through an umbrella, the same £22.00 rate would be the assignment rate paid to the umbrella, and the payslip would show deductions for the umbrella's own costs before tax. The two headline figures aren't directly comparable, which is why the Key Information Document matters.

Switching from umbrella to self-employed

If an agency offers to move you from umbrella employment to self-employment, check these first:

• Status: would the way you work actually change? A label alone doesn't make you self-employed.
• Registration: you'll need to register for Self Assessment, and for CIS too if it's construction work.
• Paperwork: you'll need to invoice (unless they self-bill), keep records, and put money aside for tax.
• Losses: no holiday pay, sick pay or employer pension, so the rate needs to cover them.

Our agency invoicing guide covers the weekly routine once you've switched.