Find the best candidates for your team

Hire full-time talent in 180+ countries

Easily manage and pay your contractors

Local benefits & insurances

Relocation and visa made easy

With no hidden fees

How we manage your data

Local HR Knowledge

Our borderless team and our global purpose

How businesses accelarate hiring with Horizons

Become a partner and benefit from unique offerings

Discover our international offices

Join our mission to shaping the New World of Work

Start hiring

What Is an International Umbrella Company & How Does It Ease Global Expansion?

umbrella company

Hire and pay talents
with Horizons in
180+ countries

Key Takeaways

1. Umbrella companies can be a useful tool for complying with UK laws relating to tax, insurance and employee benefits. 

2. The umbrella company becomes the legal employer of workers who are engaged by a client company. 

3. The umbrella company is responsible for withholding payroll tax and essential deductions, as we as administering essential benefits. 

4. Umbrella companies are similar to Professional Employer Organizations (PEOs). However, umbrella companies usually focus on short-term arrangements and work in conjunction with distinct recruitment firms. 

An umbrella company is a company that employs or contracts with the (usually temporary) workforce of a client company. The recent introduction of IR35 and off-payroll working rules in the UK has made umbrella companies are more attractive compliance solution than ever. 

Umbrella companies (also known as ‘umbrella agencies’ and ‘umbrella organizations’) are similar to, but distinct from, ‘Professional Employer Organizations’ (PEOs). While their focus may be domestic or international, umbrella companies tend to be more popular in the United Kingdom and Europe, whereas PEO services tend to be more popular in the United States and Asia.

In this guide, we explain exactly what umbrella companies are, how they can be beneficial for international expansion, and how they differ from global PEOs.

What is the definition of an international umbrella company?

Umbrella company arrangements are relatively complex commercial and legal solutions used to employ or contract a workforce, usually on a temporary basis. The best way to understand these arrangements is by setting out the different individuals or parties involved and the role that they play. Umbrella company arrangements usually involve:

  • Client companies
  • These may be construction companies, Government agencies, or indeed, any type of company that needs a workforce to be employed or contracted on its behalf;
  • Recruitment agencies
  • Recruitment agencies seek out workers on behalf of a client company. They are often paid by the client companies;


  • Individual workers
  • These individuals seeking work usually seek employment, but could also be seeking a contracting arrangement;
  • Umbrella companies themselves
  • These are specialist employment/contracting services firms that directly employ the workers. They are responsible for withholding payroll taxes, compulsory pension contributions, and administering any other compulsory benefits in the UK.

These arrangements are particularly common in the United Kingdom, and for international businesses that have operations in the United Kingdom.

What is the purpose of umbrella companies?

There are a dizzying number of ways in which a company in the United Kingdom (for example), could engage its workforce. Some of the key options include:

  • Directly employing the workers;
  • Directly engaging the workers as ‘independent contractors’
  • Directly engaging limited companies set up individually by workers. As a director of a limited company, the individual directly pays themself a (usually small) salary, as well as issuing themself dividends;
  • Using a recruitment agency to employ a workforce who are then ‘leased’ or otherwise directed to work for a client company;
  • Using a recruitment agency to contract workers as ‘independent contractors’, who are then, through a separate contract, directed to work for the client company;
  • Using an umbrella company to engage independent contractors on behalf of the recruitment agency;
  • Using an umbrella company to engage employees on behalf of the recruitment agency.

It is the last possibility that is usually implemented in an umbrella company arrangement. So, why is this option used rather than the other ones mentioned?

  • Client companies themselves often don’t find it efficient to employ temporary and fixed-term staff themselves and would rather that the recruitment agency take care of this;
  • Recruitment agencies prefer not to issue contracts to a worker-controlled limited company as these also carry significant tax and compliance liability: HRMC takes a dim view of the use of worker-generated limited companies used artificially to reduce tax and employee contribution compliance.

This means that, within the United Kingdom, using an Umbrella Company is often the most efficient and compliant mechanism for client companies to engage temporary or fixed-term staff.

Umbrella company arrangements are particularly attractive for international companies that wish to retain a workforce in another country without setting up a local entity or subsidiary to employ that workforce.

How might an umbrella company be used in a global expansion?

The traditional approach to expanding a company abroad has been to set up a local entity or subsidiary of the international enterprise in the foreign country. This is required as foreign companies are generally not permitted to hire local employees. However, there are a range of challenges associated with this: 

  • Language barriers make it difficult to understand the compliance and legal elements of setting up a new entity;
  • The global mobility process, e.g., applying for visas and work permits, is confusing;
  • Foreign bureaucracies can be slow and confusing for those unfamiliar with the system.

Engaging an umbrella company, rather than setting up a local entity, may be a way of dealing with some of these challenges.

How do umbrella companies work?

The specific umbrella structure will be based on the contracts between the relevant parties. However, set out below are the steps that are usually taken:

  • The umbrella company enters into a business-to-business (B2B) relationship with a recruitment agency to provide employment services;
  • The recruitment agency enters into a range of B2B relationships with client companies, who may be based in various foreign countries;
  • The individual signs a contract of employment directly with the umbrella company as their employer;
  • Individual workers perform their substantive work for the client companies (who may be based overseas);
  • A manager who is authorized to do so monitors daily activity on the job site and signs the professional’s timesheet. The manager signs the timesheet to confirm the days and hours worked. The timesheet may also include expenses the individual has incurred;
  • The worker submits the timesheet to the recruitment agency and the umbrella;
  • The umbrella firm prepares an invoice for the professional’s payment to the recruitment agency for the hours worked and any reimbursable expenses;
  • The recruitment agency bills the end-client;
  • End-client pays a recruitment agency;
  • The recruitment agency remits payment to the umbrella firm;
  • The umbrella company processes payroll and makes the proper allocations for the professional’s salary and reimbursable expenses, deductions for taxes, agreed-upon deductions, and the agreed-upon umbrella fee;
  • The process continues for the next pay period.

Key benefits of umbrella organization arrangements

An umbrella company bridges relationships between the client, recruitment agency, worker and the umbrella company.

Using an umbrella company has a range of potential benefits for enterprises expanding internationally, including:

  • Engaging a workforce without having to establish a foreign entity.
  • A major cost of international expansion can be the set-up and ongoing operation of a distinct legal entity, such as a subsidiary. By using an umbrella company, you don’t have to do so;
  • Ease for workers
  • As they do not have to set up their own limited company and comply with the related legal and administrative requirements (e.g., director declarations). Nor does the worker need to engage an accountant and make their own tax declarations;
  • Compliance
  • Engaging an umbrella company ensures that your overseas operations are legally compliant which, in turn, means little risk of having to back-pay taxes, compulsory contributions, and any attendant penalties. For example, they ensure full compliance with termination and employee redundancy laws, and make sure all necessary deductions are made (such as the UK Health and Social Care levy).
  • Potential tax benefits for workers
  • In some cases, individual workers are not employed by the umbrella firm, rather, the umbrella firm engages a limited company owned and operated by the individual worker. While this kind of arrangement is not without its risks, it may allow for the claiming of additional expenses and a potentially reduced taxable income.

It should be noted that the legality of different types of umbrella arrangements differs in different countries and you will need to seek professional advice before embarking on a particular type of arrangement.

What is covered by umbrella agency services?

The services an umbrella company offers will be spelled out in both a contract with the individual worker and its B2B contracts with the recruitment agency. However, core services of umbrella firms, include:

  • Providing invoicing services;
  • Withholding payroll tax and necessary deductions (Note, some tax compliance responsibility will still lie with the individual worker, such as with the UK trading allowance);
  • Payroll services for its employees, including processing timesheets, paying employees their wages and any reimbursable expenses;
  • Administering employee benefits such as sick pay, holiday pay and severance pay.

What are the risks of using an umbrella company?

Umbrella company arrangements are a useful business model for umbrella companies that strictly adhere to tax laws and regulations. However, both client companies and workers should be aware of the occasional unscrupulous operator and their typical scams. It is recommended to avoid umbrella companies offering:

  • Payment in the form of loans or grants rather than wages or salaries
  • In many cases, this is a non-compliant form of tax avoidance and can have serious consequences for all involved in an umbrella arrangement. In the United Kingdom, many workers have been forced to backpay years worth of payroll tax for using such offshore loan schemes. In addition to owing back paid taxes and contributions, those involved may be subject to penalties;
  • Extensive deductions for work expenses
  • For example, since 2016 it has been prohibited in the United Kingdom for individuals to claim expenses for travel to and from work.

What is a Professional Employer Organization (PEO)?

A Professional Employer Organization (PEO) employs a workforce on behalf of a client company. Where the organization is focused on temporary or project-based staffing they are often called a contract staffing company. PEOs come in either domestic or international forms, depending on whether they employ workers within just one country or across various different jurisdictions.

  • Domestic PEOs
  • Domestic or ‘national’ PEOs (such as those in most U.S. states) operate on a ‘co-employment’ model. This means that both the PEO and the client company have employer obligations with respect to the workforce. The PEO process payroll and withholds tax, but the client company may also remain liable under the law;
  • International or Global PEOs 
  • These usually operate as the sole ‘Employer of Record’, taking on all employer compliance responsibilities on behalf of client companies. In addition to PEO solutions, global PEOs usually provide a range of other expansion services such as recruitment, global mobility/visa support, and human resources services.
  • International PEOs often have regional offerings consolidated around a regional base, such as a Europe PEO, headquartered in Berlin, or an Asia PEO, headquartered in Singapore. 

What is the difference between an umbrella company and a global PEO?

There are several ways in which umbrella company arrangements differ from global PEO arrangements:

  • Umbrella firms are focused on supporting temporary or fixed-term engagements
  • Global PEOs often employ a workforce on permanent employment contracts (though they can engage individuals on a short-term or fixed-term basis as well);
  • Umbrella firms usually have a B2B relationship with a distinct recruitment firm
  • The umbrella company does not necessarily have a direct relationship with the client company. A global PEO always deals directly with the client company;
  • Umbrella companies provide ‘bare bones’ payroll processing and tax compliance services.
  • Global PEOs usually provide a full suite of global expansion services such as recruitment, company incorporation, employee onboarding, visa assistance, and so on.
  • Umbrella companies are common in Western Europe (e.g., the United Kingdom and its dependencies, Ireland and France), while global PEOs are more common in the Middle East and Asia.

Hire globally in 24 hours with Horizons EOR services.

How to find an umbrella company

While there are many businesses that may advertise that they provide umbrella company services, it is important to select an umbrella organization that is established and recognized in the local market.

When meeting with umbrella companies with whom you would potentially like to do business, you should ask the following questions:

1. What is your schedule of charges?

You should have a firm understanding of how the umbrella charges for its services. This may be a gross fee per week or month or a percentage. Be familiar with additional fees, such as fees to join or leave the company.

2. What is your company’s background?

You should learn as much background information about the company as possible. You should know how long it has been in business, what industries it serves, how many professionals it has, and how many companies it does business with.

3. How are contractor payments made?

You should know how professional payments are transferred and the payment schedule. Also,  you should be familiar with any extra service charges, such as same-day transfer charges. You should also be aware of the technology that is used to handle payments and timesheets and how this information is secured.

4. How do you ensure compliance?

You may be concerned about how you can ensure the umbrella company is compliant with local labor organizations and tax agencies. You may want to ask for copies of professional compliance audits.

5. Will you have an account manager?

The best umbrella companies will assign a specific account manager to handle each account.

Find out more about an umbrella agency or global PEO

If you would like more information about umbrella companies or other solutions to achieve global expansion in a more cost-efficient manner, you can contact Horizons.

We focus on providing global business solutions to companies that do not have existing legal entities or that require additional office support.

Our global business service offerings allow foreign businesses to reduce administrative costs, simplify and centralize payments, and delegate compliance and regulatory matters to a local company with existing relationships with governmental agencies.

Contact us to learn how we can help your business emerge into various promising locations.

Frequently asked questions

The purpose of an umbrella company is to stand between the worker and their workplace in a fixed-term or contracting situation, to ensure that the employee is paid in full compliance with employment and tax laws. 

Umbrella companies add a margin to the total cost of employment, that is passed on to the ultimate client. Usually, the employee does not ‘see’ the fee paid to the umbrella company. 

Hire and pay talents
with Horizons in
180+ countries

Related posts