What is an umbrella company? - It's an agency that employs temporary and self-employed workers to work for other companies. They pay you directly rather than the company you are working for. The way the umbrella company makes money is by charging a fee for their services. This is paid by either the company the people are doing the work for or the workers themselves.
What happens about my tax? - As you are paid through a company your income tax is sorted out through PAYE. They also sort out your National Insurance (NI) however the usual arrangement is you also pay the employer's NI as well. As employer's NI is charged at 13.8% on earnings above £162.01 a week it is something that needs to be taken account of if you take on work through such an arrangement.
Do I get sick pay and holidays? The umbrella company is classed as your employer so they must cover the statutory payments for sick, maternity and paternity pay. It is very unlikely they will pay anything higher than which they legally need to.
You are legally entitled to holidays and to be paid when you take them. However umbrella companies do not fund holiday pay themselves. Usually a deduction of around 12% is taken from each pay packet to cover holiday leave. You will then receive it back when you do take holidays.
Am I eligible for a pension scheme? - As your employer the umbrella will have to have a pension scheme in place since pension auto-enrolment started. If you fit the criteria you will be automatically be made a member of the pension unless you choose to opt-out. To be eligible you need to be at least 22 years of age and below state pension age, earn more than £10,000 a year or £192 a week, and work primarily in the UK.
What are the benefits? - It saves an employee who would otherwise be classed as self-employed to having to fill out their own self assessment form for tax. Also the tax and NI due is paid each month rather than having to be paid in go at the end of the year. However, this does come at the financial cost of paying fees, employer's NI and covering your own holiday pay.
Are they legal? - If done correctly they are. There is the argument that a worker should not have to pay both their own NI and the employer's. One thing to look out for this that all your own income tax is paid across correctly and that your NI has been credited to your record. You can do this online through your own Government Gateway account.
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