FAQ – Do I have to use an umbrella company for my payroll?

FAQ – Do I have to use an umbrella company for my payroll?

Umbrella companies are in high demand by contractors and freelancers looking for a compliant way to be paid while working on temporary assignments. While most offer compliant and straightforward payroll, some have recently made the headlines for the wrong reasons, including so-called “salary skimming” and signs of malpractice. In this article, we answer the commonly asked question – do I have to use an umbrella company for payroll?

Understand how compliant umbrella companies operate

Firstly, it’s essential to understand how compliant umbrella companies operate because this will help you stay clear of unscrupulous tax avoidance schemes. When you join an umbrella, you’ll become an employee of theirs for payroll purposes. You will be required to register with the umbrella company and provide several pieces of information, including your name, address, NI number, bank details and assignment information.

Upon registering, you will be sent a Contract of Employment – an important document that outlines the working relationship between your umbrella company and you. Read this extremely carefully, and if there is anything included that you’re unsure of, be sure to query it before signing and returning.

Once you have successfully joined an umbrella company, you will need to submit timesheets for the hours you’ve worked on your assignment (unless your agency is self-billing). The umbrella can then invoice your agency accordingly (or end-client if there is no recruitment agency in the supply chain). Simply put, your end client (the company you work for) will transfer your funds to your agency, and they will then pass your assignment rate to your umbrella company. The umbrella company will make all the legal deductions to your pay using HMRC’s Pay As You Earn (PAYE) tax system, including income tax and national insurance. You will also see the employment costs as deductions, the umbrella company’s margin (the administrative fee the umbrella charges for processing your payroll) and any additional deductions that may occur, such as pension contributions and student loan repayments.

When the umbrella processes your payroll, you’ll be issued a payslip showing all the deductions made to the assignment rate, and your net salary will be clearly shown. In principle, this is a summary of how compliant umbrella companies operate.

There are non-compliant “umbrella companies” targeting the UK’s temporary workforce

However, be aware that plenty of non-compliant tax avoidance schemes exist. Engaging with these could have severe impacts, such as being subject to an HMRC investigation in the future where you could face a life-changing penalty due to deemed unpaid tax and NI. Non-compliant “umbrella companies” will usually process payroll in unusual ways (not PAYE). For example, it’s been known for companies to make payments in credits, loans and shares – all as a way of avoiding tax. If you suspect a payroll provider is not compliant, do not use them under any circumstances.

Often, tax avoidance schemes will claim they’re “HMRC compliant” and can help you “legally maximise your pay”. However, these are often total lies.

Only consider engaging with an umbrella with a professional accreditation

Searching for an umbrella company can be challenging because there are hundreds to choose from. However, to make your search easier, we recommend only looking at umbrella companies with accreditation from Professional Passport or the Freelancer and Contractor Services Association (FCSA). The umbrella company sector is still unregulated by the government. Still, Professional Passport and the FCSA are self-regulating the industry – offering prestigious accreditations to umbrella companies that can prove they adhere to the highest compliance standards.

A new certification has recently entered the marketplace, and it has had quite an impact. SafeRec Certified Umbrella Companies will provide all umbrella employees with a payslip audit every time they process an employee’s payroll. This means that when you use a SafeRec Certified Umbrella Company, you can check that you have been paid compliantly. If the audit (powered by AI) identifies anything unusual, you’ll be made aware, as will the supply chain. Until now, this level of transparency has never been seen in the sector. Therefore, it is well worth looking at SafeRec Certified Umbrella Companies; plenty of these are accredited by either Professional Passport or the FCSA as well.

Recruitment agencies may present you with a Preferred Supplier List (PSL)

When working via a recruitment agency on temporary assignments, you will likely be asked to use an umbrella company on the agency’s Preferred Supplier List (PSL) – a list of umbrella companies the agency recommends. In many cases, agencies are adamant that you use an umbrella on the PSL because they will not allow you to use a different umbrella – even if the one you want to use has an accreditation.

Responsible recruitment agencies will have PSLs to protect both you and their business. After all, if an agency is found to be facilitating tax avoidance, even by mistake, it may face serious repercussions from HMRC. However, PSLs can feel quite daunting, as understandably, if you want to use an umbrella that isn’t featured, you may feel trapped. Should this situation arise, reach out to your point of contact at the agency and explain that you want to use a specific umbrella. While unlikely, they may carry out due diligence and consider adding the umbrella to their PSL.

Do you have to use an umbrella company when working on short-term assignments?

Most UK-based recruitment agencies will demand that temporary workers use an umbrella for payroll because they do not provide in-house “agency PAYE”. You should never be forced to use an umbrella company if you do not want to. However, you may face a difficult decision – use an umbrella company and work on the assignment, or risk losing the assignment completely. It is always your decision. Never join an umbrella company if you do not want to, but understand their role within the supply chain. Compliant umbrellas offer good value and helpful service to ensure you get paid correctly and efficiently. However, if you are adamant you don’t want to use an umbrella – you don’t have to. Still, you may have to consider your approach to sourcing new work because many agencies will only place candidates on short-term contracts if they agree to use an umbrella company for payroll.

Top 10 umbrella companies

Are you interested in joining a new umbrella company? If you are – we have the perfect resource! Please check out our top 10 umbrella companies. They are all accredited by Professional Passport or the FCSA, and some have special offers at the moment.

Click here to see our top 10 umbrella companies!

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