It appears that a government-proposed “Single Enforcement Body” designed to monitor umbrella companies and maintain the highest compliance standards has been put on hold. Therefore, it’s never been more important for temporary workers to understand how to pick a compliant umbrella company in 2023 and spot the obvious signs of a tax avoidance scheme. Please keep reading for more information.
There is certainly no shortage of umbrella companies. A report by the Low Income Tax Reform Group (LITRG) recently found over 500 umbrella companies are operating in the UK. With so many to choose from – how do you know which umbrella companies you can trust, and which providers should be avoided at all costs?
Pay As You Earn (PAYE)
Compliant umbrella companies will process payroll in exactly the same way – Pay As You Earn (PAYE). PAYE is the government’s tax system to ensure employees pay the correct amount of tax and National Insurance. If you ever come across an umbrella company that is promoting an alternative method of processing your payments – avoid them at all costs because they are almost certainly non-compliant.
Transparent take-home pay calculations
Before registering with an umbrella company, we recommend you request a tailored take-home pay calculation. This will provide you with an overview of the deductions that will be made to your gross pay (assignment rate) before you receive your net salary. Compliant umbrella companies will clearly show the deductions and will label them appropriately. You should expect to see income tax, Employee’s NI and employment costs (Employer’s NI and the Apprenticeship Levy). Depending on your circumstances, student loan repayments and additional deductions may also apply.
Holiday pay clarity
When you work through an umbrella, the umbrella must show a proportion of your pay as holiday pay which is a reallocation of your assignment rate (legal requirement for an employer). Most umbrellas will offer you the chance to have your holiday pay processed each time you’re paid or to have the holiday pay accrued and paid to you in a lump sum later.
It has been extremely disappointing to discover that some umbrella companies have been unethically retaining their employees’ holiday pay. In the reported cases, umbrella companies were found to have been pocketing the retained holiday pay of workers against their knowledge – boosting the umbrellas’ profits and leaving employees out of pocket. This practice is appalling. Therefore, discussing holiday pay before registering with an umbrella company is recommended. Only join once you’re entirely satisfied with how the umbrella will process holiday pay and you are certain you’ll retain every penny of it.
Umbrella company margins
The only income that compliant and ethical umbrellas generate for themselves is the margin they deduct each time payroll is processed. For example, if you join an umbrella company with a £20 per week margin, £20 per week is the only income the umbrella generates and the rest of the deductions are sent to HMRC. For more information, please read our guide: Umbrella Company Margins.
With this in mind, it’s in your interest to find an umbrella with a low margin because you’ll retain slightly more of your pay. However, don’t just pick the umbrella with the lowest margin if their service is not up to scratch.
Understanding salary skimming
Another method unethical umbrella companies have been found to retain more money against contractors’ knowledge is salary skimming. Essentially, it has been reported that a small number of umbrellas have been retaining more than just a margin for processing employees’ payroll – and this has been done against employees’ knowledge. A recent investigation by Contractor Voice determined that an FCSA-accredited umbrella was “making millions of pounds by hiding in plain sight an additional fee that has been costing contractors dearly every single week for years.”
It can be difficult to identify such unscrupulous behaviour because it’s our understanding that the umbrella in question had increased a deduction on the contractor’s payslip to retain the additional income for themselves. However, if you ever suspect foul-play, Contractor Voice offers a free service where you can submit umbrella timesheets for a review. For more information, please visit the Contractor Voice website.
Professional accreditations
For years there have been calls for the government to regulate the umbrella company marketplace. However, as things stand, the industry remains unregulated.
Despite no government intervention, there are two professional bodies that are committed to ensuring the supply chain of temporary workers is compliant with HMRC’s rules and regulations – the Freelancer and Contractor Services Association (FCSA) and Professional Passport.
To obtain an accreditation from the FCSA or Professional Passport, umbrella companies must prove they adhere to the highest compliance standards. While it is concerning a few accredited umbrellas have been accused of unethical behaviour, cases like this are rare and the FCSA and Professional Passport exist to stamp out non-compliance in the sector. Therefore, we recommend you only use an umbrella with a professional accreditation from one of these bodies.
Advice for contractors trying to pick a compliant umbrella company in 2023
Here are some tips to help you pick a compliant umbrella company in 2023. Please remember that you are responsible for ensuring you pay the correct tax and National Insurance. Therefore, conducting thorough due diligence before choosing an umbrella company is essential.
- Check the company has a long trading history and are UK-based.
- Only use an umbrella with an FCSA or Professional Passport accreditation.
- Do not hesitate to report any suspected foul-play to HMRC, an accreditation body or well-respected third-party.
- Request a tailored take home pay calculation.
- Check your payslips carefully to ensure they are compliant and the legal deductions have been made accurately. Also, check there are no deductions that you don’t understand or look unethical.
- Make sure you fully understand how compliant umbrella companies operate before using one for your payroll.
- Carry out thorough due diligence, and always consider a handful of umbrella companies before choosing your provider.
- If you suspect the umbrella you are using is not compliant, report them and switch to a different provider immediately.
- Read reviews from fellow contractors about any umbrella you are interested in using. Online reviews are a valuable, free tool to check an umbrella company’s performance.
- Keep up to date with the latest umbrella company news. We recommend searching “umbrella companies” on Google (news items).
- Speak with your friends and colleagues who use umbrella companies and ask for their advice and recommendations.
- Check the government’s website regularly for news about non-compliant umbrella companies. For example, a new ‘Corporate Report’ entitled ‘Current list of named tax avoidance schemes, promoters, enablers and suppliers’ is updated regularly and publicly names payroll providers accused of non-compliance.
- Never be tempted to use a tax avoidance scheme (non-compliant umbrella company) to boost your earning retention because the consequences could be life-changing.
Top 10 umbrella companies
If you’re interested in using an umbrella company for the first time or would like to switch to a better one, you’ve come to the right place. We have put together a list of our top 10 umbrella companies, and they’re accredited by either the Freelancer and Contractor Services Association (FCSA) or Professional Passport. Please visit our top 10 now – some have special offers that you won’t want to miss!
