Umbrella-Agency Relationships: What Contractors Need to Know
Contractors who work through umbrella companies often assume that the recruitment agency and umbrella provider are operating with their best interests in mind. In many cases, they are. However, there are times when the relationship between a recruitment agency and an umbrella company can raise concerns — particularly when transparency is lacking, and the contractor is left without clear information about pay, deductions, or compliance.
If you’re starting a new contract or are being referred to a specific umbrella company by your agency, it’s essential to understand the red flags that could indicate issues with the agency–umbrella relationship. Below, we outline the key warning signs contractors should be aware of and what steps to take to ensure you’re being paid fairly and compliantly.
Lack of Choice in Umbrella Companies
One of the most common red flags is a lack of freedom to choose your own umbrella company. If an agency insists that you use a particular umbrella company — or suggests you may lose the role if you don’t — this is cause for concern.
While agencies are allowed to recommend umbrella companies, they cannot force you to use a specific provider. This may be in breach of the Conduct of Employment Agencies and Employment Businesses Regulations 2003, which prohibit limiting a worker’s freedom of choice.
It is standard practice for agencies to offer a list of preferred or approved umbrella companies, particularly those with FCSA or SafeRec certification. However, the final decision must remain with the worker.
Inflated Take-Home Pay Estimates
If the umbrella company you are referred to offers a take-home pay figure that seems unusually high — for example, 85% or more of your contract rate — this could suggest involvement in a tax avoidance scheme.
Compliant umbrella companies should provide realistic take-home pay estimates that account for income tax, employee National Insurance, employer costs, and their margin. If a provider is vague about deductions or reluctant to issue a breakdown, this is a clear red flag.
Always request a full pay illustration before agreeing to use a particular umbrella. You can also use our umbrella company calculator to compare your expected net pay with industry standards.
No Key Information Document (KID)
Recruitment agencies are legally required to provide you with a Key Information Document (KID) before you begin a new role. This document outlines your pay rate, the deductions you can expect, and which party is responsible for paying you.
If your agency does not issue a KID, or avoids answering questions about it, this may indicate non-compliance or a lack of transparency about how you will be paid.
For more information, see our guide to Key Information Documents.
Undisclosed Commission or Referral Fees
While agencies may have commercial arrangements with umbrella companies, they must be transparent about these relationships. If you are referred to a specific provider, it’s appropriate to ask whether the agency receives any commission or financial benefit from that referral.
Lack of transparency in this area can lead to concerns that umbrellas are being recommended based on financial incentives, rather than compliance or service quality.
Delays or Inconsistencies in Payment
Contractors working through compliant umbrella companies should be paid on time and in full. Regular delays, unexplained deductions, or inconsistent pay can signal poor coordination or problems with how funds are managed.
Always check your payslip and request clarification on any figures that do not align with your contract or KID.
No Mention of Pension Auto-Enrolment
All umbrella companies are required to auto-enrol eligible employees into a workplace pension scheme after 12 weeks of employment. If you’ve had no contact about pension enrolment, or details are vague, it could be a sign of non-compliance.
Legitimate umbrella companies should clearly explain how their pension contributions work as part of your employment package. For further reading, see our article on how much pension you need.
Missing or Withheld Holiday Pay
Holiday pay is a legal entitlement. However, there have been instances of umbrella companies — particularly those with unclear agency ties — deducting holiday pay and not paying it out correctly.
If your umbrella uses the accrual method, ensure that you request any unused holiday pay before the end of the holiday year. If you are unsure of the payment method or cannot see holiday pay on your payslip, request clarification immediately.
FCSA-accredited umbrella companies are required to pay out any remaining holiday pay either at year-end or when you leave the company. For more guidance, refer to our umbrella holiday pay guide.
How to Protect Yourself
If you notice any of the above red flags in your agency–umbrella arrangement, consider taking the following steps:
- Request full transparency from both the agency and the umbrella provider.
- Ask for a written breakdown of all pay, deductions, and employer costs.
- Verify whether the umbrella company is listed on HMRC’s current named tax avoidance schemes list.
- Choose a provider with FCSA accreditation or SafeRec certification for added peace of mind.
Get Matched with a Trusted Umbrella Company
Not sure about your agency’s umbrella company? We’ll help you compare it with fully compliant alternatives.
Complete our short form and we’ll connect you with one of our Top 10 umbrella companies. Each has been independently vetted for transparency, legal compliance, and fair working practices. You’ll receive a full take-home pay calculation and clear answers to your questions — with no obligation to join.
