The Low Incomes Tax Reform (LITRG) has unveiled several valuable tips to help contractors pick a reliable umbrella company and stay clear from unethical providers. Please keep reading, and we’ll summarise the LITRG’s suggestions to help you find compliant umbrella companies.
Anyone can set up an umbrella company, so be careful
Frustratingly, there isn’t a single definition of what an umbrella company is. Therefore, anyone can go and set one up if they want to. As a result, some umbrella companies do not operate ethically or compliantly with HMRC’s rules and regulations. This could put temporary workers at risk.
Don’t rely solely on your recruitment agency’s Preferred Supplier List
If you’re sourcing a temporary role via an ethical recruitment agency, you should be able to rely on the agency’s Preferred Supplier List (PSL) to choose an umbrella company from. However, be careful because some agencies will receive incentives from payroll providers in exchange for referrals. Therefore, it’s been known for greedy recruitment agencies to make non-compliant referrals – just to make some extra money. Our recommendation is simple – only consider using an FCSA or Professional Passport accredited umbrella company. Most reliable and established recruitment agencies will only include FCSA or Professional Passport accredited members on their PSL in the first place.
Understand your rate of pay
Understanding how you’re paid through an umbrella company is crucial. Make sure you allow for employment costs (the Employers National Insurance Contributions and the Apprenticeship Levy). Agency PAYE and the rate you should get through an umbrella are different. If you’re required to use an umbrella, the agency or end-hirer should uplift your pay rate to account for the employment costs.
Don’t use a disguised remuneration scheme
Disguised remuneration schemes are arrangements that are in place to try and help you pay less tax. Usually, disguised remuneration schemes will offer to pay workers with minimum wage and a separate non-taxable element – such as a loan, grant etc. While using a disguised remuneration scheme may technically be legal, you could be retrospectively investigated by HMRC. Consequently, you may face a life-changing fine. It’s not worth the risk!
Avoid mini umbrella companies (MUC)
Mini umbrella companies (MUC) have recently been in the headlines. These non-compliant arrangements have been created to help agencies reduce their tax and National Insurance liabilities. The most concerning thing about mini umbrella companies is that some workers were enrolled on them without their knowledge. This is shocking and extremely disturbing. Our advice is always to make sure you understand who is paying you, and the figures on your payslip are as quoted. Carry out thorough due diligence before you register with a compliant umbrella.
Make sure the umbrella company process Holiday Pay correctly
Holiday Pay is another topic that’s recently been in the news because it appears some umbrella companies have been pocketing it for themselves. This is appalling. As an umbrella employee, you’ll be entitled to 12.07% of your assignment rate to be allocated to you as Holiday Pay. Whether you choose to have it paid to you each payment frequency or accrued is entirely your decision. However, Holiday Pay is your money, and nobody else’s.
Don’t be misled by umbrella companies offering perks
Many umbrella companies offer “extras” to entice contractors to register with them. Some of these perks are legitimate and will provide you with better value for money (e.g. Same Day Faster Payments, free insurance cover, etc.). However, some of these perks are either included as standard or could cost you more in the long run (e.g. mortgage deals, but you’ll need to pay a lump sum at a later date or an inflated umbrella company margin).
This article has been based on a press release by the Low Incomes Tax Reform Group (LITRG). For more information to help you find compliant umbrella companies, please check out the LITRG’s fact sheet on umbrella companies.
More information to help you find compliant umbrella companies
The umbrellacompanies.org.uk website is full of helpful information to help contractors, freelancers and temporary workers make well-informed decisions regarding their payroll. Below are some of our most popular web pages, but we recommend you conduct thorough due diligence when choosing an umbrella company. While most UK-based companies are fully compliant with HMRC’s rules and regulations, a few have given the industry a bad name. If you engage with an unethical tax avoidance scheme, you could face a severe fine – even if it was used by mistake.
Top 10 umbrella companies
To help you find compliant umbrella companies, we’ve collated a list of our top 10 umbrella companies. They are all accredited by either the FCSA or Professional Passport, and some have special offers at the moment!