The truth about umbrella companies in 2021

Shock! Umbrella companies are in the news again. It’s mightily frustrating to read that some umbrellas out there completely disregard the rules and put their employees at risk of non-compliance. Now seems the perfect opportunity to reassure our readers that most UK-based umbrella companies are compliant and provide a pretty helpful service with added extras you may not be aware of. This article sets out to explain some of the most contentious issues surrounding umbrella companies. Hopefully, it’ll help those in doubt understand the truth about umbrella companies.

Compliant umbrella companies are not tax avoidance schemes

We’re sure you’ve read something recently that’s suggested that all umbrella companies are “cowboys”, and the industry is in chaos because it’s “not regulated”. Let us clear this up. Yes – some umbrellas are behaving appallingly and are promoting tax avoidance. These umbrella companies are a disgrace, and the government should severely punish the people behind them (and those who facilitate tax avoidance). However, it’s a tiny minority that’s causing the whole industry to be dragged through the mud.

Compliant umbrella companies will process their employees’ payroll using Pay As You Earn (PAYE) – HMRC’s tax system. This ensures employees pay the correct tax and National Insurance Contributions so they’ll never face an HMRC tax investigation in the future.

If you don’t want to use an umbrella company – you don’t’ have to. Some roles may be available to those prepared to use an umbrella only, which is pretty tough to accept. However, you should never feel pressured into using an umbrella company. Always conduct your due diligence, and only register with an umbrella if you’re entirely comfortable.

Compliant umbrella companies are not retaining employment costs to boost profit

This needs to be cleared up once and for all. Compliant umbrella companies do not deduct employment costs to increase their profit. The government clear this up in their guidance ‘Working through an umbrella company’:

“The rate paid to the umbrella company by the agency will need to cover the costs of the employer National Insurance contributions. The umbrella company will use this money to pay employer contributions and not deduct the contributions from your gross pay.”

The umbrella company margin is the only financial value that a compliant provider will retain for itself. The rest of the deductions are sent directly to HMRC. It’s that simple.

Contractors new to umbrella companies need to understand the employment costs and how they work – before registering. Temporary workers should discuss these amounts with the end-client/agency before signing up with an umbrella so that contractors are happy with their rate and the projected net salary.

Compliant umbrella companies do not withhold holiday pay

Recently in the news, an unnamed “compliant” umbrella company has been accused of retaining its employees’ holiday pay. If this is true – shame on them. This is unacceptable, and in our eyes, it’s theft. However, please understand compliant umbrella companies wouldn’t do this.

Most umbrella employees are presented with an option regarding their holiday pay upon sign up with an umbrella. They can choose to have it paid to them each payment frequency or accrued and paid in a lump sum later. Either way, this holiday pay (12.07% of the assignment rate) is the contractors/umbrella employees money – and not the umbrellas. If you suspect an umbrella is illegally retaining holiday pay, contact HMRC immediately.

Compliant umbrella companies run payroll for temporary workers because most agencies don’t want to do it themselves

Running payroll is actually very resource-heavy and time-consuming. It’s quite a task and one that many recruitment agencies prefer to outsource to umbrella companies. This removes the administrative burden from the agency and reduces employment-based risks. The world of compliant umbrella companies isn’t particularly glamorous. They provide a service in exchange for their margin.

Compliant umbrella companies are committed to compliance

The umbrella marketplace has experienced rapid growth over the last five years – mainly due to changes to off-payroll legislation (IR35). The marketplace is saturated, and there are over 500 umbrella companies to choose from. Therefore, many are doing everything within their power to prove to the supply chain that they’re compliant.

The FCSA and Professional Passport are two highly respected professional bodies dedicated to ensuring the supply chain of temporary workers is compliant and ethical. Both organisations offer a prestigious accreditation to umbrella companies – and we recommend you only consider registering with an FCSA or Professional Passport accredited umbrella company. The umbrella company sector isn’t officially regulated. However, the FCSA and Professional Passport are doing a spectacular job at self-regulating the industry. Their accreditations are a dependable sign that an umbrella has its employees’ best interests at heart.

Top 10 umbrella companies

If you’re looking for an umbrella company you can trust – you’ve come to the right place. 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. Please check them out!

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Click here to see our top 10 umbrella companies!

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