Using an umbrella company is a popular payroll choice for tens of thousands of contractors and freelancers working on temporary assignments. However, not everyone is keen to use an umbrella. There have been reports of recruitment agencies forcing temporary workers to use specific umbrella companies if they want to keep the assignment. You shouldn’t ever feel pressured to use an umbrella company if you don’t want to. However, before making a decision, you should understand how they work and what your options are. Keep reading for more information.
How should compliant umbrella companies work – a quick step-by-step guide
Before deciding whether you want to use an umbrella company for your payroll, it’s essential to understand how they work. Here is a typical quick step-by-step guide to how umbrella companies work, including the initial stages of requesting take-home pay calculations.
- Firstly, if you’re interested in using an umbrella, find a small number that you like the look of and request a take-home pay calculation from each. Remember, you must choose an umbrella company that processes payroll in accordance with HMRC’s tax system Pay As You Earn (PAYE). If you find a payroll provider boasting a different pay style, avoid them at all costs because they’re almost certainly non-compliant.
- When you’ve found an umbrella you want to join, contact them over the phone, and they’ll complete the initial registration process with you. You will need to provide several pieces of personal information.
- Once registered, you’ll be sent a Contract of Employment. You must read this thoroughly and only sign and return it if you’re entirely happy with its content. The umbrella will also require proof of your identity and right to work in the UK.
- When you have returned the signed Contract of Employment and have provided acceptable proof of identity, you will have completed the registration process. The umbrella company will sign an overarching contract with your agency/direct with the hirer to ensure your funds are passed efficiently down the supply chain.
- You need to submit the hours you have worked to your umbrella so they can invoice your agency correctly.
- Your end-hirer will pass your gross pay (also referred to as the assignment rate because it’s the amount you agreed to be paid with the understanding you would be using the services of an umbrella for your payroll) to your umbrella.
- The umbrella receives your gross pay and makes all the legal deductions necessary, including a margin (the umbrella company’s only source of income). The deductions include income tax, Employee’s National Insurance Contributions, the employment costs (Apprenticeship Levy and Employer’s National Insurance Contributions) and pension/student loan repayments – if applicable.
- You will then receive your net salary supported with a payslip.
There are over 500 umbrella companies in the UK, and it’s vital you pick a compliant one
Choosing a compliant umbrella company is crucial. Not only will a compliant umbrella ensure you pay your fair share of tax and National Insurance, but it will protect you from any potential tax investigations in the future. While tax avoidance is technically legal, HMRC is actively hunting unethical schemes, and workers who use them are being retrospectively punished. Therefore, even if a scheme is “legal” at the moment if HMRC deems it unethical and tax avoidance in the future – you could face a severe penalty. Believe us – it’s not worth the risk.
The government does not regulate the umbrella company marketplace, but this may change soon. However, two well-respected professional bodies regulate the sector, the Freelancer and Contractor Services Association (FCSA) and Professional Passport. Both parties are committed to ensuring the supply chain of temporary workers is compliant with UK tax law, and they set out to help contractors and freelancers make well-informed and dependable decisions regarding their payroll.
If you don’t want to use an umbrella company, you don’t have to
Before you consider taking a temporary assignment, you should familiarise yourself with your payroll options. A lot will depend on your IR35 status because many contractors prefer to accept roles outside IR35 to allow them to operate through a personal service company (PSC).
For those inside IR35, using an umbrella company is a popular choice because it ensures you pay the correct tax and National Insurance to HMRC – to avoid any unexpected and unwelcome tax bills in the future. However, the demand for umbrellas has been sudden (in response to changes to off-payroll working rules in the private and public sectors).
You may be happy to use an umbrella if the assignment rate is attractive. However, if you’re unhappy with using an umbrella, you might prefer to use the agency’s payroll – if they provide this service. Never feel pressured into using an umbrella company; do not register with one if you have any doubts. However, be prepared to miss out on some assignments because agencies and end-hirers often insist their temporary workers use umbrellas for compliance purposes.
A contractor has recently convinced their recruitment agency to use an umbrella company not on the Preferred Supplier List (PSL)
In a recent high-profile case, a contractor challenged their recruitment agency after being presented with a Preferred Supplier List. Without hesitation, the worker let the agency know they would go elsewhere for their work if they were not allowed to use an umbrella company of their choice – one that wasn’t on the PSL.
This isn’t often the case; agencies usually demand you use their preferred suppliers, or tough – you can’t work on the role and will need to source work through different channels. Therefore, if you want to use an umbrella but have a particular provider in mind, you may want to check they’re on your agency’s PSL, or you could run into problems. Don’t forget to ask your agency if they would consider adding the umbrella to their PSL if it’s not on there because some will be accommodating.
Interestingly, Paul Sheraton, a contractor, has recently launched a petition because he believes “the law needs to change around this to allow contractors the [choice] over which Umbrella company they choose”. You can view and sign the petition on the official Change.org website.
Are recruitment agency Preferred Supplier Lists (PSL) a good or bad thing?
Yes and no. If you’re sourcing roles through a trustworthy agency with an excellent reputation, chances are their PSL is up to date and full of compliant payroll businesses only. After all, the Criminal Finances Act (2017) means any agency found to make non-compliant referrals could be punished – even if the referrals were by mistake.
However, we don’t like the fact that some contractors are told, “use an umbrella on our PSL, or you can’t work on the assignment and we’ll find someone else”. While compliant umbrellas have strict PSLs to protect workers, not all have the same priorities.
A growing number of recruitment agencies are now operating PSLs that consist purely of FCSA or Professional Passport accredited umbrella companies, and we think this is a brilliant idea.
To put it simply, if you source work through a dependable agency with a good reputation, they should have a PSL in place to protect you. Therefore, using an umbrella on their PSL is a good option – but always carry out due diligence too.
Top 10 umbrella companies
To help make your search for a reliable umbrella company more straightforward, we’ve collated a list of our top 10 umbrella companies. They’re all accredited by either the FCSA or Professional Passport. Some of them also have special offers at the moment – so check them out!