In United Kingdom, a special employment agency works for the independent contractors so to provide them some work usually temporary contracts. The employer to these people is normally a company. An Umbrella Company is an example of such type of company. Normally a limited company is chosen for a contract as it reduces the recruitment agencies liabilities towards the contracts. The procedure for the payment is like this. Invoices are issued to the recruitment agency or may be to a client. When the payment of the invoices is made, the contractor will be paid through PAYE.

After IR35 legislation has been introduced by the British government, the prevalence of these umbrella companies has been increased. This legislation defines such clauses that enforce to determine the ability and employment status so as to provide some tax relief to the small companies. Benefits of healthier and cleaner carpets contracts can be given to such small companies.

But one should not confused Umbrella Company with Managed Service Company. Umbrella Company does not come under the Managed Service Company's definition. All the conditions of Section 61B (1), Part 2 ITEPA and chapter 9 are to satisfied by a company so as to become a Managed Service Company. But as Umbrella Companies does not satisfy second condition, they don't come under MSC.

But as far as tax calculation, as how much tax is to be paid, is concern, all umbrella companies follow the same PAYE calculation rules. The difference would be the level of services provided to a customer along with the fee that customer has to pay. The dispensation scheme is one of the widely used associated concerns with the umbrella companies. As they have special agreement with HMRC, an umbrella company, along with dispensation is considered better than others. Most of the Umbrella companies advertise same options but the difference comes in the details which are to be checked by customer.