There are now more umbrella companies than ever before. In fact, a recent report found that there were over 500 umbrella companies operating in the UK.
With a lot of umbrella companies out there, it’s crucial that contractors know how to spot a compliant company. After all, although most providers can be trusted, there are a small number that can’t.
To help, Umbrella Broker has put together this guide outlining what a compliant umbrella company is and how you can spot one, so contractors can rest assured they are making the best decision.
What is a compliant Umbrella Company?
It is important to know that there is no such thing as an HMRC-approved umbrella company. This is because an umbrella company is classified the same as any other employer, meaning HMRC does not approve some companies over others.
Although there is no such thing as an HMRC-approved umbrella company, there is such as thing as an HMRC compliant company.
A compliant umbrella company ensures that the contractor is paying the right amounts of tax and National Insurance and is not part of a tax avoidance scheme.
Using a non-compliant umbrella company can open contractors up to investigations by HMRC, which can have a series of negative consequences.
Clearly, it’s of crucial importance that contractors ensure they are working through a compliant umbrella company. So, how do you spot a compliant company?
Make sure they operate PAYE
A key sign in spotting a compliant company is to check that it uses the pay-as-you-earn (PAYE) tax system to pay its employees.
The PAYE system is the most common way to pay tax in the UK, with the majority of employees paying tax like this.
Umbrella companies that use this system process the contractor’s fee through PAYE, which ensures the correct amounts of tax and National Insurance is deducted from the contractor’s pay before it is finally paid to them. This means that the contractor can rest assured that they are tax compliant.
It is also crucial to check that the umbrella company will process 100% of the contractor’s pay through the PAYE system.
Some umbrella companies will offer to process only a percentage of the contractor’s pay through the payroll and pay the remainder directly to the contractor.
In such cases, only a portion of the contractor’s salary is being processed through the PAYE system and as such, only a portion is subject to tax deductions. This is classified as tax avoidance and if you are caught, it will be the contractor, not the umbrella company, who will be penalised.
Check that they offer realistic take home projections
Some umbrella companies will claim that the contractor can keep up to 80-85% of their wages whilst still remaining tax compliant.
However, it is important to note that this is not the case. This is due to the fact that the basic rate of income tax stands at 20%, and National Insurance contributions are also taken off the contractor’s pay, meaning that there will be no instance in which a contractor can keep up to 85% of their pay.
Although it might be tempting to choose an umbrella company that makes such claims, it’s important to remember that it is you, the contractor, that is responsible for fulfilling your own tax obligations meaning if you are caught it will be you facing fines and penalties.
Steer clear of companies offering to pay contractors through loans, credit or investment payments
Contractors must also avoid any umbrella company that offers to pay them through a loan, credit, or investment payment. This is because these channels are not subject to income tax, meaning that if the contractor is paid in such a way, they are not fulfilling their tax obligations.
Umbrella companies using such avenues will claim that they are a legitimate way to pay the contractor, however, it is worth noting that HMRC has stated that this counts as tax avoidance.
Are they accredited by the FCSA?
The Freelancer and Contractor Services Association (FCSA) is the UK’s professional body that ensures that temporary workers and those that use their services, including umbrella companies, are compliant.
This means that those umbrella companies that are FCSA accredited have undergone a number of audits and assessments which ensure that they comply with strict codes of conduct and compliance.
Therefore, this is a great way to ensure that the umbrella company you wish to work with is compliant. Simply head over to the FCSA website to check which umbrella companies are compliant.
Do they provide employee rights?
Finally, it is important to check that the umbrella company provides statutory rights to the contractors to ensure that they are compliant with their requirements towards the worker.
Every umbrella company is legally required to provide the contractor with statutory sick pay, a workplace pension, holiday pay and maternity and paternity pay. This is because the umbrella company is the contractor’s employer.
Choosing a non-compliant umbrella company can lead to the umbrella company failing to provide the contractor with these key rights, which can leave the contractor in a vulnerable position.
