10 facts about using a contractor umbrella company

If you’re interested in using a contractor umbrella company for your payroll, but aren’t sure how they work, you’ve found the right article! Here are 10 facts about umbrella companies. How many of the following were you already aware of?

Firstly, we must make it clear – the following facts are based on compliant umbrella companies only. Whatever you do, make sure you only choose a compliant umbrella company for your payroll. If you use a non-compliant umbrella company (tax avoidance scheme), the consequences could be severe!

If you join a contractor umbrella company, they become your employer

When you register with an umbrella company, you become their employee, and they become your employer. This means you’re eligible for Employee Benefits, including Statutory Sick Pay and Maternity/Paternity Pay – should you require it. However, you do not actually conduct any work for your umbrella company (your employer) because you will be working for your client.

Umbrella companies operate Pay As You Earn (PAYE)

If you use an umbrella company, you’ll be paid via the HMRC system called Pay As You Earn (PAYE). This is how employees in permanent employment are paid. PAYE means that your umbrella company will send the right tax and National Insurance deductions to HMRC on your behalf.

The only income umbrella companies generate for themselves is their margin

All compliant umbrella companies will deduct a margin each time they process your payroll. This amount will cover their business costs. The margin is the only deduction that the umbrella company retains for themselves. The rest of the deductions are paid to HMRC on your behalf (excluding Holiday Pay which is either paid to you each time your payroll is processed, or it’s accrued for you to claim at a later date).

Here’s another important thing to bear in mind – because compliant umbrella companies operate PAYE, they process your payroll in the same way. Therefore, don’t be fooled by one umbrella company offering you a take home pay calculation that is higher than another. The only thing that should vary between providers is the margin they retain for service (typically an amount between £15 and £25). This means the margin is the only thing that should alter your take home pay (for example, you should expect to retain a couple of extra pounds each payroll period if you use an umbrella with a £15 margin compared to an umbrella with a £25 margin).

Umbrella companies do not decide what deductions are made to your pay – HMRC does

Following on from the previous fact, we would like to reiterate that umbrella companies do not decide what deductions are made to your pay. Instead, HMRC do.

For more information, please read our blog ‘Your Umbrella Company Does Not Decide How Much You Are Deducted – HMRC Does’.

Registering with an umbrella company can take under 10 minutes

Compliant umbrella companies must gather important information about you and your assignment. This included personal information, where you’re working, proof of your ID and Right to Work in the UK, etc. However, if the umbrella is efficient, this process can be completed in roughly 10 minutes.

You’re free to use the contractor umbrella company as and when you please

Umbrella companies should never tie you in to their service, and they will only deduct their margin when they pay you. Therefore, you’re free to use an umbrella as little and often as you like, and the good ones will explain this to you when you register.

You will almost certainly not be eligible to claim expenses

Since the introduction of Supervision, Direction and Control, hardly any umbrella employees are able to claim tax relief in business expense any more. If you come across an umbrella company that is actively promoting the opportunity to claim expenses – alarm bells should be ringing. The chances are – they’re non-compliant. This is often considered one of the main disadvantages of using an umbrella company.

It’s a good idea to keep your limited company ticking over – if you have one

Changes to off-payroll in the private sector (IR35) are set to come into effect in April 2021. As a result, it’s expected that several limited company contractors may be required to use an umbrella company at some point in the future (as they could be deemed as ‘inside IR35’ by their client). If this is the case, you can still keep your limited company open. By doing this, you’re free to work through it again in the future on assignments that are outside IR35. Have a word with your contractor accountant because many offer an “inactive” service with significantly reduced fees.

Evil tax avoidance schemes are actively targeting vulnerable contractors

Compliant umbrella companies will operate PAYE (as mentioned above) and will send the correct tax and National Insurance Contributions to HMRC on your behalf. Unfortunately, there are tax avoidance schemes actively targeting contractors and freelancers.

Tax avoidances schemes will typically offer you an inflated take home pay. We’re urging you – do not be tempted to use one. Engaging with a tax avoidance scheme could result in severe penalties from HMRC and the consequences could be life-changing.

We highly recommend you only consider using a contractor umbrella company that has achieved a prestigious accreditation, such as an accreditation from the FCSA or Professional Passport. Umbrella companies that have obtained such accreditations will have been able to prove they operate compliantly and in accordance with UK tax law and regulations.

Most contractor umbrella companies will offer ‘extras’ as part of their service

Many umbrella companies will offer some extras to entice you to join them (to stand out in a crowded marketplace). Don’t take these for granted, as they could be really useful and provide you with added value for money. And, provided you choose a compliant umbrella company with a well-respected accreditation, the extras on offer will be perfectly legitimate, and may include:

  • Same Day Faster Payments
  • Sign up offers (low margin, or a week free, for example)
  • Free insurance cover
  • Access to Employee Benefit scheme (discounts at retailers, restaurants, etc.)
  • And more.

Looking for more information about umbrella companies?

We hope you’ve found the contractor umbrella company facts above useful. If you have any further questions about umbrella companies, please check out our umbrella company FAQs. We have also produced an umbrella company example that you may find really useful. It explains how the supply chain works together, and how the contractor is paid through the umbrella company.

Top 10 umbrella companies

If you’re interested in speaking with a leading contractor umbrella company, we recommend you look at our top 10 umbrella companies. Every one of our top 10 is accredited by the FCSA, and they’d be delighted to answer any questions you have.

Alternatively, you may be in a hurry. If this is the case, why not request a free, no-obligation take home pay projection from one of our top 10 umbrella companies? Or, why not schedule a call with a top 10 umbrella company at a convenient time?

Click here to see our top 10 umbrella companies!

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