The Association of Independent Professionals and the Self-Employed (IPSE) has released a report which looks at the attitudes of temporary workers who are using the services of umbrella companies for payroll. The report has some fascinating findings, as we summarise in this article. Please keep reading for more information and a link to the original report available on the IPSE website.
Overview
The changes to off-payroll working in the public and private sectors have changed how temporary workers operate. Over one in three contractors and freelancers work through an umbrella company for payroll purposes. While hiring organisations have had plenty of time to understand the new working rules, IPSE found that one in five end clients implemented blanket “inside” IR35 assessments. Unquestionably, this has resulted in a rapid increase in demand for umbrella companies and will have contributed to the growing marketplace. The Low Incomes Tax Reform Group (LITRG) confirmed in research last year that there are now over 500 umbrella companies in the UK, and the marketplace is saturated.
Please note that the percentages used throughout this article do not add up to 100% because the umbrella workers who participated in the research were allowed to respond to each question more than once.
IR35 has contributed to the rise in demand for umbrella companies
IPSE’s research found that 69% of umbrella company employees reported using an umbrella for their payroll because of the IR35 changes in the private sector. An additional 31% of those asked confirmed they were using an umbrella because their recruitment agency insisted they used this payroll method for assignments. 14% mentioned their current role was advertised as needing to use an umbrella for payroll. Interestingly, 8% stated they chose to use an umbrella company. Here are a few quotes from participants in IPSE’s research into umbrella companies:
- “I’m effectively being forced to work this way against my will due to my Client’s lack of understanding of IR35!”
- “Quite often they [umbrella companies] are “a necessary evil” as a consequence of IR35 regulation and clients wishing to protect themselves across the board rather than judging each case in its merits.”
- “All financial service companies have blanket banned using contractors through Ltd companies, despite what HMRC say. It’s incredibly unfair to be taxed like an employee and also pay employers taxes while not being entitled to the same benefits as employees. Being a so called ’employee’ of an umbrella is a joke.”
Onboarding inconsistencies
The onboarding umbrella process was examined in IPSE’s research, and there were some rather concerning findings. 40% of workers said their umbrella would allow them to keep their existing pension arrangement in place, while 30% said this wasn’t an option.
When using an umbrella company, it’s common knowledge that agencies are encouraged to offer an inflated pay rate to consider the Employment Costs. However, 29% of umbrella employees engaged in this research said their rate was not amended to consider the umbrella company’s payroll methods (PAYE). 12% said an increased rate was discussed but never went live. For those who did see an increase in their rate of pay, 13% were told the increase would be available but did not get an explanation as to why. And, 9% reported the increase was to cover costs such as the Employer’s National Insurance Contributions.
Payslips, contracts and Key Information Documents
IPSE asked umbrella company employees if they were issued with an umbrella company payslip, a contract and a Key Information Document when starting. 88% of workers said they were provided with terms or a contract, with 8% saying they hadn’t and 4% not certain.
Interestingly, just over 50% of those asked said they were issued with a Key Information Document, with 24% saying they had not been issued one and 19% not sure.
94% of respondents said they had been provided with a payslip by their live or previous umbrella company, while only 3% said they hadn’t, and 1% were unsure. Here are some quotes from participants in the umbrella company research:
- “Payslips are provided, but are difficult to interpret and check because of holiday, use of low regular pay with fake bonus, bundling of tax. I have no choice but to be paid weekly and this can skew the tax & NI compared with monthly. Also makes a mess of pension payments.”
- “The company accidentally paid me somebody else’s pay slip in the first month. I was asked to keep the money, and pay it back over time. This was initially disturbing, but worked out okay.”
- “Payslips wrong almost every month. They have one job and do not do it very well, costing me money.”
- “[…] had a very complicated Employment Contract that I contacted them about to ask to opt out of several ridiculous clauses, but they have never produced an amended version.”
Umbrella satisfaction is very low
IPSE’s research found that only 16% of umbrella company workers were “either somewhat or very satisfied” with the concept of working through an umbrella company. 74% confirmed they were unhappy with using an umbrella, and over 50% were “very dissatisfied”.
Unsurprisingly, the reduction in pay retention was one of the main reasons umbrella workers were not satisfied. One participant stated that using an umbrella “erodes any advantage there is to being a freelancer against, what is without question, already a backdrop of risk and uncertainty”.
Here are a few more figures from IPSE’s research regarding the advantages of using umbrella companies:
- 26% of umbrella company workers said the reduced administrative burden of using an umbrella (compared to being the director of a limited company) was an advantage.
- 8% mentioned that professional liability insurance was also a welcomed advantage of using an umbrella company.
- 6% outlined the umbrella company pension auto-enrolment as a benefit.
- Another 6% said they were happy with the ability to have continuous income through an umbrella.
- The ability to claim Statutory Sick Pay as an advantage of using an umbrella company was only cited by 5% of respondents.
- Well over half of the umbrella workers (61%) said there were no advantages of working through an umbrella company.
Here are a few quotes from respondents:
- “My experience so far (< 2 months) has been satisfactory. It is nice to be receiving a salary quickly and to have reduced stress managing my limited company. However, this contract could easily be justified as outside IR35, and it is distressing to think that my company may become unviable if this is the future of contracting.”
- “My whole consultancy business has been destroyed by blanket banning of contractors outside IR35 and there is no benefit of using an umbrella company.”
- “No benefits at all – just huge administration burden (two lots of timesheets to do – one for client and one for umbrella company).”
Umbrella workers stated many reasons why they were dissatisfied with using umbrella companies. Below are some statistics:
- 80% of umbrella workers stated the employment costs were the main reason they were not satisfied with umbrella companies (the Employer’s National Insurance Contributions and the Apprenticeship Levy).
- A similar percentage (79%) of umbrella workers said they were not happy paying their umbrella company a fee (the umbrella company margin).
- 75% of umbrella workers highlighted the fewer tax breaks (compared to being the director of a limited company) as a major disadvantage of being paid through an umbrella company, and 70% referenced the lack of independence and control of finances as a significant disadvantage.
- 72% of those involved in the research stated they were not happy with the lack of employment benefits compared to full-time employees.
- Only 1% of umbrella workers said there are no disadvantages of using an umbrella company.
Holiday Pay
Umbrella company employees are entitled to Holiday Pay and a majority of umbrellas will process this efficiently, transparently and compliantly. However, there has recently been a few accusations thrown in the direction of a couple of umbrella companies because they have apparently withheld the accrued Holiday Pay of some workers.
IPSE’s report set out to identify how umbrella workers perceive Holiday Pay, and how umbrella companies are processing it. Here are some of the key findings:
- 55% of umbrella workers would “like to be able to elect to receive all” pay as they work, ignoring Holiday Pay on temporary/fixed term roles to ensure nothing is withheld.
- 39% would prefer to have Holiday Pay processed each payment frequency rather than having it withheld – to ensure its processed correctly and compliantly.
- 26% would like Holiday Pay to be “abolished”.
- 15% would like “to take time off and get paid Holiday Pay” if it’s accrued (like a permanent employee).
- 10% would like the rate paid to the umbrella by the supply chain to include a specific amount of Holiday Pay.
Please read the full report on IPSE’s website
To access the full IPSE report entitled “The umbrella company market: Assessing the attitudes and concerns of umbrella company workers”, please click here. This article has summarised some of the key points, but there are plenty of additional pieces of information in the original report, and it is well worth reading.
Top 10 umbrella companies
If you’re a temporary worker and interested in using an umbrella company, there are many to choose from (over 500), and it can be a stressful task. We’ve collated a list of our top 10 umbrella companies to make your life easier. They’re all accredited by either the Freelancer and Contractor Services Association (FCSA) or Professional Passport – two leading professional bodies. Please take a look when you can – some have special offers at the moment!
