Umbrella Company Examples – The Difference Between A Compliant Umbrella And Tax Avoidance Scheme

Umbrella company examples – the difference between a compliant umbrella and tax avoidance scheme

We’ve noticed that many contractors and freelancers are Google searching for ‘umbrella company examples’, and as a result, our team has put a few examples together to help you out. Please keep reading for two umbrella company examples – one example being an experience with a compliant umbrella company and the second example being an example of a tax avoidance scheme. Hopefully, you’ll find this helpful.

Firstly – never engage with a tax avoidance scheme

Before we run through a couple of umbrella company examples, we must stress something – please do not ever engage with a tax avoidance scheme or non-compliant umbrella company, and always carry out thorough due diligence before registering with a payroll provider.

Umbrella company example – a compliant umbrella

Here are the elements that represent a perfect example of a compliant umbrella company.

Pay As You Earn (PAYE)

All compliant umbrella companies will process payroll in the same way – with HMRC’s tax system Pay As You Earn (PAYE). Therefore, if you have previously contracted through a limited company (outside IR35), you may have an unpleasant surprise if you ask an umbrella for a pay calculation because your retention will be lower.

Margin

The only thing that will vary between compliant umbrella companies is their deductible margin for processing payroll. The margin is the only income an umbrella generates for itself. The rest of the deductions on an umbrella payslip are sent to HMRC on your behalf. For example, choosing an umbrella with a £15 per week margin rather than an umbrella with a £30 per week margin will retain a few extra pounds each payment frequency. However, it will only be a few extra pounds because margins are deducted from your gross pay – meaning you save on the tax. This means that you are probably better off choosing an umbrella with a margin that offers you the best value – as well as considering the quality of service. After all, paying £5 more per week is worth it if you are paid by a reliable umbrella that offers extras rather than a provider with terrible customer service. However, the choice is yours!

Compliance

Compliant umbrella companies will operate PAYE – as mentioned above. However, those providers genuinely committed to compliance will want to showcase this by earning a well-respected accreditation from a leading professional body, and there are two within the umbrella payroll sector. These are the Freelancer and Contractor Services Association (FCSA) and Professional Passport.

Both the FCSA and Professional Passport strive to protect temporary workers by ensuring the supply chain is compliant with UK tax law and regulations. Earning accreditation from either party is extremely difficult and requires umbrella companies to go through strict audits and assessments. Only when they have been able to prove all their processes are compliant and in the best interests of their employees will they gain accreditation. And, once accreditation is earned – it’s not permanent. Umbrellas will be audited annually to ensure the processes remain compliant and up to date.

We recommend that you only use umbrellas accredited by either the FCSA or Professional Passport because these companies are dedicated to compliance. We’ve collated a list of FCSA and Professional Passport accredited umbrella companies for you to review to make life easier. Please take a look.

Registering and onboarding

Registering with an umbrella company shouldn’t take too long – usually 15-20 minutes. You will be required to provide the umbrella with a lot of personal information which they require by law to be your employer, including full name, nationality, address, NI number, assignment details, bank information, and more.

Once you have completed the initial registration process, you will be sent a Contract of Employment. It’s imperative you read the contract carefully and only sign and return it if you’re entirely happy with its content. Before you complete the registration process, you’ll also be required to provide proof of your identity and right to work (RTW) in the UK. The umbrella will also ask you for a P45 document. If you don’t have one – don’t worry. You can complete the government’s online form – Starter Checklist for PAYE.

Registering with an umbrella company may be quite demanding due to the amount of associated administration. However, it’s important the information is exchanged to ensure you’re paid accurately, on time and compliantly with UK tax law.

If you are unhappy with your umbrella company or wish to discontinue with their service, leaving is easy. You need to let the umbrella know your desire to move away and request a P45. There should be no leaving fees or complex administration. Umbrella company margins only apply when you’re paid through the umbrella. Therefore, you won’t be paying them anything if you’re not using them. If you wish to switch umbrella companies, be prepared to go through the same thorough registration and onboarding processes with your new umbrella – assuming they’re compliant.

Pensions

As a UK employer, umbrella companies are legally required to enrol employees into a pension scheme within three months. Therefore, whether you want to contribute to the umbrella’s preferred pension provider or not, you will have to make one contribution before you can opt out. But don’t worry – you can have your first contribution returned to you as long as you follow the correct instructions. While this may be annoying – it’s not the fault of umbrella companies because they are following the law.

A few umbrella companies can accommodate employees with private pensions. If you are interested in boosting a private pension tax-efficiently, you should seek an umbrella offering salary sacrifice. Umbrellas that provide this service may have an inflated margin, but you may decide this is well worth it.

Holiday Pay

As an umbrella employee, you are entitled to Holiday Pay. Firstly, you must understand this needs to be taken into account when you are negotiating your assignment rate because this is where you’re Holiday Pay allocation is from. Your umbrella will ensure you are paid Holiday Pay compliantly (12.07% of your assignment rate), and this is usually done in two ways – it’s paid to you every payment frequency, or it’s accrued and paid in a lump sum at a later date.

You must understand Holiday Pay before registering with an umbrella because it’s been the centre of attention in the press of late. Recently, an umbrella was accused of unlawfully retaining the unclaimed Holiday Pay of its employees, and this is appalling. No umbrella should ever do this, so always be sure you discuss Holiday Pay with your umbrella before signing up with them.

Getting paid

Every time you’re paid with an umbrella company, you’ll be issued a supporting payslip which will show all of the deductions to your pay. These will include the following:

  • Income tax
  • Employer’s National Insurance Contributions
  • Employment costs
    • Employee’s National Insurance Contributions
    • Apprenticeship levy
  • The umbrella company’s margin
  • Holiday Pay

You may be subjected to the following deductions as well:

  • Student loan repayments
  • Pension contributions (if you didn’t opt out)

Everything on your umbrella company payslip should be made very clear, including your gross pay, all deductions, and your net salary. If you have any doubts about what’s included on your payslip – ask your umbrella immediately or report them if you suspect foul play.

Summary

Compliant umbrella companies should:

  • Follow HMRC’s rules and regulations.
  • Provide you with an accurate take home pay calculation, taking into account PAYE, employment costs and your working situation.
  • Boast pay retention roughly between 50 and 65 percent (but pay retention will vary based on individual circumstances).
  • Issue you with a Key Information Document.
  • Provide example payslips, if required.
  • Have a solid reputation.
  • Explain how Holiday Pay and pensions work before you register with them.
  • Be based in the UK.
  • Support you throughout the registration process.
  • Not be on the government’s radar (for example, they should not have been issued with a Scheme Reference Number).
  • Enrol you into a pension plan within three months (but you can choose to opt out, if you want).
  • Deduct a margin each time they process your payroll, but this should have been explained to you before committing to their service.
  • Explain that it’s easy for you to join/leave their service.
  • The government has several helpful guides to help temporary workers make well-informed decisions regarding umbrella companies. Please read our article for a summary: Will The Government Regulate Umbrella Companies In 2022?

Umbrella company example – a tax avoidance scheme

Here are the elements that represent a perfect example of non-compliant umbrella companies. Remember – never engage with an umbrella company you have any concerns about. It’s vital that you use a compliant umbrella for all your temporary assignments.

Inflated pay promises and claims to help you reduce tax

Tax avoidance schemes will approach things very differently from compliant umbrella companies. Firstly, before you register, you’ll almost certainly be presented with a higher than usual pay calculation because unsurprisingly, tax avoidance schemes help you pay less tax! Any company offering to help you pay less tax and retain more of your money should be avoided at all costs. As the saying goes – if it’s too good to be true – it probably is!

If you come across a payroll provider not operating PAYE – be extremely wary. PAYE isn’t glamorous, but it’s the compliant way umbrella companies should be paying employees.

Scheme Reference Numbers (SRN)

Suppose the government is aware of an umbrella company or payroll provider it believes is acting unethically or is facilitating tax avoidance. In that case, they will issue it with a Scheme Reference Number (SRN). It would help if you never considered using an umbrella or payroll intermediary that has been issued an SRN because it’s under investigation and could be found to be acting unethically – meaning it will be closed down, and those who have used it may be subjected to penalties, including a large tax bill.

Weird payment arrangements

Tax avoidance schemes are known for their creative payment arrangements. After all, tax avoidance is technically legal – but engaging with schemes facilitating tax avoidance is a terrible idea because HMRC can retrospectively punish you and demand unpaid tax.

In the past, tax avoidance schemes have involved the following unusual payment arrangements:

  • Paying workers with a loan which is not expected to be repaid – to avoid tax.
  • Issuing workers with credits for a job board which can immediately be traded for tax-free cash.
  • Handing out shares in the company to then exchange for tax-free cash.
  • Distributing payments in terms of capital payments, salary advances, credit annuities and bonuses.

As we keep repeating – compliant umbrellas will pay you with PAYE. Therefore, if you ever come across a company boasting about a new payment method that’s compliant and involves any of the above – do not use them because they’re almost certainly going to get you in serious trouble with HMRC at some point in the future.

Bold claims and outright lies

Over the years, we’ve noticed that tax avoidance schemes and non-compliant umbrella companies make outrageous claims that are definitely lies. Below are a few claims we’ve heard, along with an explanation of why it’s ridiculous:

  • “Better than PAYE” – It might allow you to retain more than PAYE, but PAYE is the legal payment method for umbrella employees. If a scheme is offering you more than PAYE – it should be avoided because it will be bending the rules.
  • “IR35 compliant” – How can a payroll provider be IR35 compliant? If you’re inside IR35 – your agency or end-client will let you know, and you will need to receive PAYE. If you’re outside IR35, you can potentially contract through a personal service company. But any company offering you significantly inflated pay retention while claiming to be “IR35 compliant” should be treated with caution because they’re probably trying to trick you.
  • “Retain up to 90% of your pay” – No need to explain this in too much detail! If an umbrella is offering you upwards of 90% ray retention – they will be helping you avoid tax and NI – which is not right and will land you in trouble in the future. Don’t be tempted.
  • “Approved by HMRC” – HMRC acknowledges that umbrella companies exist and have published several pieces of guidance to help temporary workers make well-informed decisions regarding their payroll provider. However, HMRC does not endorse umbrella companies or have a list of umbrella companies they recommend you use.
  • “[Company Name] helped me retain far more of my hard-earned money because it’s my right” – Okay, so we’ve made this one up. However, it’s common for tax avoidance schemes and unethical payroll companies to feature quotes from “happy clients” on their websites. Either the quotes are true and reiterate the company’s dishonest objectives, or they’re entirely fake and are designed to put wool over your eyes. Never be tempted by fake testimonials. If you have any queries or concerns about the legitimacy of a payroll provider – look them up on trusted review platforms such as Trustpilot.

Unreliable companies and directors

A classic example of a non-compliant umbrella company would be a business set up within the last few months with directors who have no experience. What seems to happen is these companies are set up to operate non-compliantly before being shut down. The people behind the businesses then create another new business and follow the same procedures. This makes it very hard for the government to identify tax avoidance schemes and the people behind them. For example, mini umbrella company fraud came to light during the coronavirus pandemic and involved hundreds of newly formed umbrellas backed by directors with no track record in the UK. These mini umbrella companies were set up to help facilitate tax avoidance.

It is also well known that lots of tax avoidance schemes are located outside of the UK in famous tax havens such as the Cayman Islands and the Channel Islands. If you are working on assignments in the UK, it makes sense that you should be paid by a payroll provider also based in the UK. Therefore, if you suspect a company is offshore – do not use them as it’s unlikely they abide by UK tax rules and regulations.

Expenses

Since the government rolled out legislation (Supervision, Direction and Control) in 2016, most umbrella employees cannot claim tax relief on expenses. However, this doesn’t stop non-compliant umbrella companies from promoting the fact they can help contractors claim expenses. Be extremely cautious if you ever come across an umbrella company that is actively advertising the fact they can help contractors and freelancers claim all types of expenses. In reality, the only expenses that umbrella employees can access are the same as those in permanent employment. For example, expenses that arise directly as a result of work, such as travel and overnight stays.

Lack of accreditation

An excellent way for compliant umbrella companies to showcase their commitment to compliance is to earn a well-respected accreditation from the FCSA or Professional Passport because these are the two leading professional bodies in the sector. Therefore, unethical umbrella companies and tax avoidance schemes will not have such accreditation. We recommend that you only consider using umbrellas which are members of the FCSA or Professional Passport.

It’s worth noting that some unethical payroll providers advertise that they’re accredited by organisations that have no track record of doing anything positive within the temporary worker payroll industry. It’s our understanding that some of these so-called accreditations are a complete farse and are backed by unscrupulous criminals – purely to trick contractors and freelancers.

Summary

Tax avoidance scheme will probably:

  • Offer you inflated pay retention – sometimes upwards of 90%.
  • Pay you in unusual ways, such as loan payments, shares, credits, etc.
  • Not process Pay As You Earn (PAYE).
  • Have websites that fail to answer a lot of your questions.
  • Be difficult to contact.
  • Advertise that you can claim all types of expenses with ease.
  • Not have a long trading history.
  • Have directors with a lack of experience.
  • Not have any professional accreditations. For an umbrella company to obtain an accreditation from the FCSA or Professional Passport, for example, they must prove they operate compliantly.
  • Use unethical, misleading and inaccurate marketing to encourage you to join. Be wary of phrases such as “IR35 friendly”, “approved by HMRC”, “fully legal payroll”, and “better than PAYE”.
  • Be based outside the UK in well-known tax havens, such as the Cayman Islands or Channel Islands.

Further reading

Here are some guides and articles that you may find helpful:

Top 10 umbrella companies

If you’re interested in using an umbrella company for the first time or want to move away from an umbrella company that’s not meeting your expectations – we can help. We’ve put together a list of our top 10 umbrella companies. They’re all accredited by either the FCSA or Professional Passport. Please check them out when you get a moment – some have special offers at the moment!

The Complete Umbrella Company Guide - Download Now

Click here to see our top 10 umbrella companies!

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