The demand for umbrella companies is rising due to recent changes to off-payroll working rules (IR35). It’s estimated that hundreds of thousands of temporary workers require the services of an umbrella for their payroll. Our latest article is aimed at both well-established contractors and those who are becoming temporary workers for the first time. You may be interested in finding an umbrella company in the New Year – whether for the first time, or you’re ready to switch to a netter provider that offers a more reliable service. Keep reading because we have ten helpful tips for contractors and freelancers.
Understand how umbrella companies work
If you have used an umbrella company in the past, or you’re using one at the moment, you should understand how they operate. However, if you’re new to umbrella companies, there can be a lot of information to get your head around.
To put it simply, umbrella companies are payment intermediaries that process the payroll of temporary workers who are undertaking assignments with an end client or through an agency. The responsibility of the umbrella company is to gather the worker’s pay (gross) from the client or agency and then make the appropriate tax and National Insurance deductions before paying the worker their net pay.
By registering with an umbrella company, you become an employee, and the umbrella company is your employer. Therefore, you gain access to employee benefits such as Statutory Sick Pay and Maternity/Paternity pay. You can also benefit from free insurance cover, but make sure you check what’s on offer from an umbrella before registering with them.
If you use a compliant umbrella company, you will have nothing to worry about. You will be paying the correct tax and National Insurance deductions to HMRC. However, since umbrella companies have grown in demand since changes to IR35 legislation (off-payroll working rules in the private and public sectors), more dodgy umbrella companies have appeared and could land you in serious trouble with HMRC. It is a good idea to ensure you only consider using an umbrella that is accredited by either the Freelancer and Contractor Services Association (FCSA) or Professional Passport. These are the two most respected and recognised accreditation bodies in the UK committed to ensuring the supply chain of temporary workers is compliant and ethical.
For more information, read our webpage on umbrella companies explained, or download The Complete Umbrella Company Guide.
Research PAYE and what an umbrella company margin is
Compliant umbrella companies operate in exactly the same way – they process payments using Pay As You Earn – the government’s tax system. Therefore, if you want to approach two compliant umbrella companies for a quote – you should receive an identical take-home pay illustration – assuming both umbrella companies have the same margin. But, what is an umbrella company margin?
Each time an umbrella company processes the payroll of an employee, they’ll deduct a margin. This is usually a fixed amount that’s deducted to cover the umbrella’s administration and business costs. Margins tend to be weekly or monthly and vary between providers. However, you should expect to see margins in the regions of £15 to £25 per week or £60 to £100 per month. Remember, the lower the margin, the higher your pay retention. However, as most margins are deducted from your gross rate of pay for tax purposes, the difference in pay retention between an umbrella with a £15 per week margin compared to one with a £20 weekly margin won’t be much at all. Always consider the level of service you’ll receive, as it’s not always recommended to choose the umbrella with the lowest margin. As the saying goes – “you get what you pay for!”
Consider your options
Umbrella companies are a popular choice for thousands of contractors and freelancers. However, this doesn’t mean you should feel forced into using one if you don’t want to. In many cases, temporary assignments will require you to be working through an umbrella company because your end client or agency won’t have the infrastructure in place to run payroll themselves. However, assess your options – because plenty of recruitment agencies do offer an in-house payroll service. If you don’t want to use an umbrella company, you may need to consider this before accepting a role.
Only seek an accredited umbrella company from a reliable source
The first point briefly mentioned this, but opting for a compliant umbrella company is critically important. There are currently over 500 umbrella companies in the UK. Most are compliant, but a few are operating tax avoidance schemes or disguised remuneration arrangements, and engaging with one of these could land you in serious trouble with HMRC.
Firstly, you must understand compliant umbrella companies will operate PAYE. This means that you should expect to retain roughly 50 to 70 percent of your earnings (although it will vary due to several factors). If you ever come across an umbrella company offering you inflated pay retention – you should avoid them at all costs because they’re almost certainly unethically processing payroll.
Engaging with a tax avoidance scheme could land you in serious trouble with HMRC, and they could open an investigation long into the future. If you’re found to have avoided tax, even by accident, you could be subjected to a considerable fine, as well as additional penalties. The risk isn’t worth it.
To ensure you choose a trustworthy umbrella company, it’s a great idea to seek a payroll provider that is accredited by either the FCSA or Professional Passport. These are the two most respected professional bodies in the UK. To obtain accreditation, umbrella companies must prove they operate compliantly and in the best interests of their employees. Numerous assessments and audits must be completed to the professional bodies’ satisfaction before accreditations are handed out. And, once an umbrella gets accreditation from the FCSA or Professional Passport – it’s not the end of the road. They must undergo annual audits to ensure they remain compliant.
Make sure you definitely use UK-based umbrella companies
As a UK worker, it makes sense to assume you need to use a payroll provider that’s based in the UK. Many unethical tax avoidance schemes operate from well-known tax havens such as Bermuda, the Channel Islands, the Cayman Islands, and south-east Asia.
To avoid the risks associated with offshore intermediaries (non-compliant payroll providers who almost certainly encourage tax avoidance), check the history of the umbrella company that you’re interested in using. Make sure they are based in the UK and have a legitimate track record on Companies House.
In a few points time, we discuss the risks of engaging with a tax avoidance scheme.
Use the government guidance that’s available
There is plenty of government guidance available about umbrella companies. The government does not actively endorse umbrella companies, but they do provide information that will help you choose a compliant umbrella company. Here is what’s available:
- Working through an umbrella company
- Check if you are at risk of tax avoidance
- Check your payslip if you work through an umbrella company
- Check how to reduce your risk of using an umbrella company that operates a tax avoidance scheme
For more information, please read our blog: What Government Guidance Is Available About Umbrella Companies?
Research the risk of using a tax avoidance scheme, and how to identify non-compliant payroll arrangements
Tax avoidance schemes are evil, and using one could land you in serious trouble. The consequences could include:
- An HMRC investigation
- Paying back all underpaid tax and National Insurance Contributions
- Being responsible for paying interest on all underpaid tax and National Insurance Contributions
- Additional penalties
Being able to spot a tax avoidance scheme from a compliant umbrella company is very important. Here are some tips:
- Never feel pressured into using a service you don’t feel comfortable with. While most recruitment agencies will have a Preferred Supplier List (PSL) consisting of ethical umbrella companies that will provide you with legitimate services, some recruiters have been actively facilitating tax avoidance to line their own pockets with referral rewards. Be extremely careful, and conduct thorough due diligence.
- Only use UK-based umbrella companies.
- Don’t be tempted to use a scheme that advertises inflated take-home pay.
- Understand how legitimate umbrella companies work (PAYE). Disguised remuneration schemes usually process payroll in uncommon ways – for example by combining the National Minimum Wage (NMW) with loan payments, credits, refunds, etc. IF a scheme sounds unusual or dodgy – don’t use it, and seek advice from professionals.
- Consider only using umbrella companies that are accredited by the FCSA or Professional Passport.
- Don’t use companies with hidden information. Make sure you use established payroll providers with transparent information available on Companies House. For example, a recent fraud that stunned the industry involved mini umbrella companies which were set up by offshore directors with no trading history. Contractors were actually referred to mini umbrella companies against their knowledge by recruiters who either hadn’t done their research or were deliberately seeking to benefit themselves from making unethical referrals.
- Read government guidance that’s designed to help you make well-informed decisions regarding your payroll.
- Don’t be afraid to ask as many questions as you want – to the umbrella, your agency, or your client.
- Report an umbrella company if you suspect they’re up to no good. The following article will help you with this: How To Report A Non-Compliant Umbrella Company
Throughout the Umbrellacompanies.org.uk website, there is plenty of information about the risks associated with tax avoidance schemes. It’s vital that you only consider using compliant payroll providers that’ll ensure your tax affairs are accurate and up to date. Please – never consider using an ethical arrangement that promises inflated pay retention. As a UK tax-payer, it’s your responsibility to pay the correct tax and National Insurance Contributions. And, the risks of using tax avoidances schemes could be life-changing.
Please check out the following:
- Greedy Contractors Could Be Fueling Tax Avoidance Schemes
- HMRC Issue Warning In New Corporate Report Covering Marketed Tax Avoidance Schemes – “Please Be Vigilant”
- Compliant Umbrellas Help The Government And Don’t Contribute Towards Lost Tax
- The Warning Signs Of A Tax Avoidance Scheme
- How To Spot A Tax Avoidance Scheme, And Why You Should Never Use One
- A Guide To Tax Avoidance Schemes
- A Quick Look At Disguised Remuneration
Check online reviews thoroughly
Monitoring online reviews is extremely important if you’re looking for a new product or service. With so many umbrella companies to choose from, it would be daft not to compare companies online to get an idea of what their current and past employees thought of their service. The best review platforms, in our opinion, are Google and Trustpilot. Take a look and see how the companies you’re considering using are performing on these sites. It’s pretty obvious to say, but if a company has loads of bad reviews and a poor overall rating, you will probably be better off avoiding them. However, it’s a good idea to read the negative reviews because sometimes, people can be entirely unreasonable, or the review has been left because the individual didn’t understand how umbrella companies worked in the first place.
Discover what is included as part of the payroll arrangement
Umbrella companies (compliant umbrella companies) will process your payroll with PAYE and send your salary to your bank account. However, due to the amount of competition in the UK’s marketplace, some umbrella companies offer additional “extras” as a legitimate way to enhance their service. If you’re interested in getting more for the margin, check and see if the umbrella you’re interested in offers and of the following:
- Same Day Faster Payments
- Insurance cover
- Access to a time-saving mobile app
- Employee reward scheme
- Referral rewards (e.g. if you refer a friend to their service, can you benefit in any way, such as a margin-free week or two?)
- Account Manager
- Sign up offers (e.g. a week free)
Gage what the customer service will be like
Look at online reviews, and speak with the umbrella company directly. Ask them what their service is like and their response time to both email and phone queries. Some umbrella companies offer exceptional levels of customer service, while others are understaffed and struggle to respond to questions quickly.
Top 10 umbrella companies
If you’re looking for a reliable umbrella company that you can trust, we’ve collated a top 10 umbrella companies list that we think you will find instrumental as a starting point. All of our top 10 umbrella companies are accredited by either the FCSA or Professional Passport. And, some have special offers at the moment. Please go and check them out.
If you’re interested in obtaining a free and accurate take-home pay calculation based entirely on your circumstances, please visit Umbrella Company Calculator – a site we built to help the UK’s temporary workforce.
