Umbrella companies are often portrayed negatively by third party organisations who have a vendetta against the government for implementing changes to off-payroll legislation. As a result, umbrella companies are frequently being made a scapegoat. Don’t believe everything you read. Here are eleven facts about umbrella companies.
They operate PAYE
Compliant umbrella companies pay their employees by using HMRC’s tax system called Pay As You Earn (PAYE). This means that the correct deductions are made by the umbrella and are sent directly to HMRC – before the employee (the contractor/freelancer) receives their net salary.
They only retain a margin for their services
The only income umbrella companies generate for themselves is their margin. This amount is deducted from an employee’s gross pay and usually varies between £15 and £30 per week – depending on the payroll provider. The umbrella company margin should always be agreed upon before you’re paid by an umbrella company so that you know what’s coming and you don’t get any unwelcome surprises. The margin is the only income an umbrella generates for itself, and as point 1 stated – the rest of the deductions a worker will see on an umbrella payslip are sent to HMRC directly.
They have no hidden fees
There should never be any hidden or extra fees when you use a compliant umbrella company. The only thing that they will retain is the margin they deduct. An umbrella should never require you to pay a joining or leaving fee, and there should never be a tie-in period.
They include free insurance cover
Pick your umbrella company wisely – because some will offer little extras as thank you for joining them (we discuss these later in the article). However, compliant umbrella companies include insurance cover within their margin, and this could prove invaluable. Usually, inclusive insurance will be:
- Employer’s Liability Insurance
- Public Liability Insurance
- Professional Indemnity Insurance
They become your employer in the eyes of the law
When you register with an umbrella company, you officially become an employee of theirs, and they become your employee. As a result, you’ll get access to employee rights, including Statutory Benefits (Sick Pay/Maternity and Paternity Pay, etc.).
They operate compliantly and in accordance with UK tax law
Umbrella companies are generally regarded as legitimate payroll providers in the eyes of HMRC. HMRC even state that most “employment agencies and umbrella companies operate within the tax rules.” However, there are a few that have given the industry a bad name – and these are the examples you’ve probably read about that have made you wary of the umbrella company marketplace.
Third parties are frustrated by changes to IR35, and they’re taking their frustration out on the umbrella company sector
While 99% of umbrella companies are compliant and operate in their employees’ best interests, one or two have acted immorally, and it’s such a shame. For example, tax avoidance schemes target vulnerable temporary workers (including key workers) and could land them in serious trouble. Also, an accredited umbrella company was recently accused of unlawfully retaining the holiday pay of its workers. These incidents are serious but rare. We want to reiterate the fact that 99% of umbrella companies are compliant and transparent. There are some “anti-umbrella company” campaigns running at the moment by third parties that claim to be trying to help. What we’ve found is they are doing the opposite, and they’re scaremongering by spreading misleading gossip.
You must do your own research before engaging with an umbrella company, and never forget that it’s entirely your choice whether to use an umbrella or not. However, providing you choose a compliant umbrella for your payroll – you have nothing to worry about. Don’t forget – many contractors will happily endorse umbrella companies because, after all – using one is the easiest way for self-employed professionals to get paid, and many include extras to add value to its employees. We’ve just had a quick Google search for some of the most well-known umbrellas in the UK, and some have glowing reviews.
They will not pretend that they can help you retain more money compared to limited company contracting
It’s no secret – if you’re outside IR35, contracting through a limited company (personal service company) is the best way to maximise your pay retention compliantly. This means that for assignments inside IR35, umbrella companies are a suitable option (because there are no tax benefits for working through a limited company inside IR35).
Umbrella companies should never imply that they’ll help you retain more money than you should or that they’re “tax-efficient”. Umbrellas operate PAYE and will make deductions to your gross pay. You should expect to retain between 55 and 70 percent of your pay after deductions. You should avoid any umbrella promoting inflated pay retention – they’re probably a tax avoidance scheme.
Prestigious accreditations are available for umbrella companies to showcase their compliance
The two most recognised professional bodies within the umbrella payroll sector are the Freelancer and Contractor Services Association (FCSA) and Professional Passport. These organisations set out to ensure the marketplace is compliant and providers always act in their employees’ best interests. Therefore, we strongly recommend you choose an umbrella company that has an FCSA or Professional Passport accreditation.
The FCSA and Professional Passport are the good guys trying to ensure the umbrella company and payroll marketplace is compliant, and workers are protected. Please don’t believe anything you read that suggests these companies are not committed to compliance – because it’s almost certainly nonsense.
We must add that we’re in no way associated with either the FCSA or Professional Passport – we appreciate their efforts to protect temporary workers and the marketplace’s integrity.
If you ever come across an umbrella company that you believe is acting immorally or unlawfully, we urge you to report them. Read our blog ‘How to report a non-compliant umbrella company’ for more information.
They will explain every deduction that’ll be made to your pay, including employment costs
One of the most contentious issues with using an umbrella company is the employment costs (Employer’s National Insurance Contributions and the Apprenticeship Levy). These deductions are required to come from the assignment rate – the rate the contractor agrees with an end-client or agency with the understanding that an umbrella company will be used for payroll purposes.
When you register with an umbrella company, they should explain in detail about Employer’s National Insurance Contributions and the Apprenticeship Levy. Remember, they’re not retaining these amounts for themselves. Instead, they’re sending them to HMRC. If you have any questions about employment costs – don’t be afraid to ask the umbrella company you’re considering signing up with.
They may provide little extras that are really useful
There are over 500 umbrella companies in the UK, making it a very competitive marketplace. As a result, it’s common for umbrella companies to offer their employees some little “extras” as a way of adding value to their service. These may include, but are not limited to:
- Same Day Faster Payments
- Employee Discount Schemes
- Discounted margins
- High insurance cover
Are you interested in getting the most from the umbrella company margin? Read our blog ‘How to identify genuine umbrella company special offers’ for some useful tips.
Top 10 umbrella companies
Are you looking for a new umbrella company to process your payroll? If you are, you’ve come to the right place. We’ve collated a top 10 umbrella companies list, and they’re all accredited by the FCSA. Check them out – some have special offers on at the moment.
Read the umbrellacompanies.org.uk disclaimer here.