Choosing An Umbrella Company
Contracting’s rise in popularity over the last 20 years has coincided with the increased restrictions on operating via a limited company imposed by the IR35 legislation. This has led to considerable growth in the number of umbrella companies; there are now estimated to be over 500 in the UK.
Once you’ve decided to contract via an umbrella company, the next question you will likely ask is, how do I choose an umbrella company? Which umbrella company is best? Choose a ‘compliant’ umbrella company, and you have nothing to worry about; choose a non-compliant one, and you could find yourself in serious trouble with HMRC, owing thousands in tax.
This guide will help you identify the best umbrella companies and provide tips for choosing between them.
Can I Choose My Own Umbrella Company?
Recruitment agencies and end clients often have a preferred suppliers list, an exclusive list of umbrella companies they work with. If you want to work with a particular agency or client, your choice of which umbrella company to use could be restricted.
Although most agencies and clients will conduct a review before putting an umbrella company on their preferred supplier’s list, being on the list is not an indicator of trustworthiness or compliance. There could be a referral fee arrangement in place.
Given the potential penalties for working through a non-compliant umbrella company, we recommend contractors perform their due diligence before signing up with an umbrella firm.
How to Check if an Umbrella Company is 'Compliant'
It is often difficult to distinguish between compliant and non-compliant umbrella companies simply by their website or a brief call. Some umbrella companies claim they’re “HMRC-approved” or “IR35-compliant”. While these claims may sound impressive, they are, in fact, meaningless.
HMRC does not “approve” umbrella companies, and IR35 compliance has nothing to do with how your umbrella company pays you. It is determined by your contract, working conditions and relationship with the end client.
‘Compliant’ is a slight misnomer regarding umbrella companies, as the Government does not regulate umbrella companies. There is, therefore, no official accreditation that recognises compliant umbrella companies.
When we refer to ‘compliant’, we mean umbrella companies offering a legitimate management solution. They are wholly transparent in their dealings with workers, providing an explicit contract of employment, clearly responding to any queries via phone or email, and remaining completely transparent in how taxes and pay are calculated. They follow the rules and regulations prescribed by HMRC.
While HMRC does not endorse the compliance of umbrella companies, two professional bodies self-regulate the umbrella company sector: the Freelancer and Contractor Services Association (FCSA) and Professional Passport.
For an umbrella company to earn accreditation from either the FCSA or Professional Passport, they must undergo a series of assessments and audits to prove they operate compliantly and in the very best interests of their employees. Once accreditations are awarded, umbrella companies are assessed annually to ensure they maintain high standards.
Umbrella Companies Comparison Sites
Before you choose which umbrella company to join for your contracting business, chances are you’ll seek out reviews online. Google makes it incredibly simple to find information relating to umbrella companies online; however, the integrity of such information is often questionable.
The past few years have seen a massive growth in umbrella comparison websites, sites asking you to enter your details and they’ll send you a personalised quote. While some of these sites may be legitimate, many are not. You’ll often find the top recommended slots on these comparison sites to be populated by the site’s sponsors. The umbrella companies willing to pay the most get recommended to contractors – hardly an impartial or fair review service!
Although there will always be scope for fake or manipulated reviews to be included, review websites like Trustpilot or Feefo can be used as valuable barometers to determine how particular umbrella companies treat their contractors. As long as you approach the reviews cautiously, these sites can provide indicators of the overall perception of a given umbrella company.
Reddit also has an active contractor community that can be called upon for advice regarding which umbrella company to use.
Worst Umbrella Companies
Some umbrella companies may try to entice you by suggesting they offer a more efficient payment structure. The most common methods are (i) splitting your salary into multiple payments with only one going through PAYE, (ii) paying you via an offshore structure, or (iii) paying you via a share ownership agreement.
These schemes are tax avoidance or, at worst, tax evasion. As an umbrella company employee, you should receive 100% of your income through PAYE. Working through an umbrella company offering anything else could expose you to backdated taxes, penalties, and late interest payments should HMRC catch you.
All umbrella companies are required to follow HMRC’s tax rules and regulations; there is almost no room to manage your tax liability advantageously once you enter PAYE. Take-home pay should never vary, regardless of the umbrella company chosen, and as such, it is difficult for one compliant umbrella company to be significantly better than another.
Contractors should also be wary of umbrella companies with entry fees, exit fees or penalties for leaving early. The company is your employer, so assuming you adhere to your terms of employment, it should not be charging you anything beyond the agreed margin.
Finally, you should avoid umbrella companies that link their margin to the contractor’s rate. A reputable umbrella will not charge you for what you earn; no additional work is involved from their perspective should your rate increase.
Best Umbrella Companies
The best umbrella companies will ensure the process of being paid is simple and stress-free. Good umbrella companies typically make a payment run every week (some make several per week), ensuring you’re paid reasonably soon after invoice submission.
Salary sacrifice pension contributions are essential for contractors to reduce their tax liability, especially those earning over £100k. Not all umbrella companies offer salary sacrifice arrangements, and where they do, some charge additional fees for processing these payments. It’s worth noting that these additional charges, assuming they’re not exorbitant, are usually reasonable given the extra administration involved for the umbrella company.
Furthermore, a reputable umbrella company should provide you with support and advice, promptly responding to emails or calls. Fully automated and online umbrella companies may be cheaper, but it is almost certain you will need to speak to a qualified person at some point during your contract.
The two most recommended umbrella companies on the Reddit ContractorUK forum are Paystream and NASA.