There is plenty of hearsay when it comes to umbrella companies, and we’ve heard some remarkable statements over the last few years. It is no secret that since 2017, the demand for umbrella companies has skyrocketed, and so has the number of companies offering PAYE payroll services. While a majority of these companies are compliant and operate in their clients’ best interests, some have tainted the industry’s reputation because they have acted unethically, and in some cases, illegally.
We’ve written this article to help you distinguish between real scenarios, inaccurate myths, and entirely fake news regarding the umbrella company payroll sector.
We hope you find it useful.
Compliant Umbrellas v Non-Compliant Umbrellas
There are a small number of unethical umbrella companies that are giving the industry a bad name. As a compliant umbrella company, this infuriates us. We hear many unusual questions and concerns from contractors who are enquiring about our service. Sadly, we understand why.
To make this blog as useful as possible, we’ve taken quotes that we’ve heard from potential clients, or have read online, and addressed each of them from both a compliant and non-compliant umbrellas perspective. We hope you find it useful. And at the end, we explain how you can identify whether or not an umbrella company is compliant – it’s easier than you think.
There is a lot of fake news out there; don’t let it alter your perception on the industry.
“Some umbrella companies are offering to help me pay less tax”
If you come across an umbrella company offering to help you pay less tax – you’re looking at a tax avoidance scheme. Why? Because every compliant umbrella company in the UK will process your pay in the same way.
Tax avoidance is serious and something you should never consider getting involved in. HMRC has stepped up its efforts to catch tax avoiders, and it is not uncommon for people to be penalised for historical cases. Did you know that HMRC doesn’t care if you engaged with a tax avoidance scheme by mistake – you will still be required to pay back every penny they think you owe.
Sadly, there are many non-compliant umbrella companies out there targeting temporary workers. These providers will often pay their clients in an unusual arrangement. For example, payments may be made by combining the national minimum wage with a loan, credit, investment, and other strange-sounding phrases.
The BBC has recently been made aware of a tax avoidance scheme targeting key workers. The umbrella company in question was found to be offering nurses and social workers upwards of 78% pay retention – an amount too high for a compliant PAYE payroll company. They were also pocketing a hefty fee for their services.
We are all expected to pay tax and National Insurance Contributions following HMRC’s rules and regulations. As a result, compliant umbrella companies offer a PAYE payroll service; ensuring the correct deductions are made to your pay and sent directly to HMRC.
Nobody likes paying tax, but we’re all obligated to do so, and taking advantage of unethical loopholes (such as tax avoidance schemes) could result in devastating consequences. If you come across an umbrella company offering you a strange arrangement that allows you to pay less than your fair share of tax – don’t be tempted. Take it from us; you should avoid companies like this at all costs. Please don’t say we didn’t warn you.
“I was quoted a much higher take home pay than what I have actually received”
There can be many reasons for this occurring, and not all of them are malicious.
An unscrupulous sales technique
Some umbrella companies will manipulate the take home pay figure they give you – to try and encourage you to sign up with them. Therefore, you must remember that every compliant umbrella company will process your pay in the same way. This means the only thing that should impact your take home pay between providers is their margin.
E.g. if Umbrella A has a £25 per week margin and Umbrella B has a £15 per week margin – you should expect to take home a little bit more with Umbrella B as a result of the margin – and that is all.
Most umbrellas (including us) will use the 1250L Week 1/Month 1 tax code in their illustrations. However, others may use a more lenient tax code so that your projected take home pay in unrealistically high.
Scotland also has a different tax system. Unlike many providers, Churchill Knight Umbrella can offer accurate projections based on both the English and Scottish tax system.
When you complete the registration process with an umbrella, you’ll need to provide them with a P45 or New Worker Checklist. Failure to do this could result in you being given an emergency tax code. If this is the case, it’s not the umbrellas fault because this is a legal requirement.
The Illustration Period
You want to make sure any illustrations you receive are realistic and take things like holiday and Bank Holidays into account. It may be surprising to know that some providers will provide you with deliberately misleading calculations that don’t take any time off into account. Therefore, you’ll be shown a higher take home pay than other umbrellas, but it’ll be based on you taking no time off over the year whatsoever!
Your Individual Circumstances
Calculations should be based on your circumstances. However, an umbrella can’t know precisely how much you have worked over the tax year. As a contractor, your workload and salary are likely to vary throughout from assignment to assignment. Therefore, the quote you receive from an umbrella should be accurate, but you must allow some leeway. Also, the umbrella will not know how much of your tax-free allowance remains (if any) until they pay you, and this will influence the amount you are paid.
For more information on this, please read our blog: Why is my umbrella take home pay illustration different to my actual net take home?
“My umbrella is forcing me to join a pension scheme I am not interested in”
It is a legal requirement for umbrella companies to enrol their clients into a pension scheme after 12 weeks. However, you can choose to opt-out as soon as you have made your first contribution. And, this amount can be returned to you quickly – should you decide to leave.
You should never feel pressured to stay with a pension plan. And, if you have opted out, you should never see any pension deductions on your payslip. Compliant umbrella companies will explain pensions to you thoroughly. Never be afraid to ask any questions.
“My umbrella take home pay is far less than when I was contracting through a limited company”
Frustratingly, this is usually the case. Contractors who are outside IR35 and paying themselves as the Director of a limited company (personal service company) can combine dividends with salary. This method is more tax efficient when compared to a compliant umbrella company (PAYE) – where you typically retain between 60% and 70% of your pay.
“Umbrella companies are stealing my wage and keeping it for themselves”
Compliant Umbrella Companies
The only income that compliant umbrella companies generate for themselves is the margin they charge for conducting payroll. This margin covers administration, wages, and the general day to day costs of running a business. They will not make any more money for running payroll, and all of the additional deductions made to their clients’ pay is sent to HMRC.
Non-Compliant Umbrella Companies
There have been historical cases where unlawful umbrella companies have been accused of taking their clients Holiday Pay and keeping it for themselves. This is scandalous, and yes, it’s “stealing”. If you believe you have used a company that has done this in the past, you should contact HMRC without hesitation, and seek legal advice.
Holiday Pay should be shown on every umbrella employees’ payslip, and the amount is a reallocation of their salary (12.07%). Every client should be able to choose whether they want the 12.07% Holiday Pay paid to them directly (every time their umbrella processes their payroll), or accrued and settled in a lump sum at a later date. Either way, the 12.07% Holiday Pay is their money and does not belong to the umbrella company.
While it’s not technically stealing (unless their clients were lied to about this fee), the following is interesting too. Earlier, we referred to a tax avoidance scheme identified by the BBC. Despite offering their clients a higher take home pay retention, the company itself was also pocketing a considerable fee – far more than a traditional and compliant UK-based umbrella company. Not only were they leading their clients down a reckless path, but they were getting rich in the process!
“It’s illegal to charge me the Employers National Insurance”
The Employers NICs (13.8%) and Apprenticeship Levy (0.5%) are considered “employment costs”. Companies with a permanent workforce directly benefit from the duties being carried out by them. As a result, they can afford to pay for employment costs. Umbrella companies are different.
Umbrella companies don’t benefit from the work their employees complete, and consequently, cannot afford the employment costs. After all, the only income compliant umbrella companies generate is from their margin. If they were responsible for employment costs, they would operate at a loss and cease to exist. This is why the employment costs are passed on to the temporary worker.
Initially, this sounds unfair. However, it would be best if you always considered the employment costs when negotiating a contract (when the services of an umbrella company are required). It is wise to speak with your agency or client about employment costs and being upfront. Ask them whether they have considered the employment costs deductions. If they say no – ask for an uplift in your rate.
“Umbrella companies don’t care about their clients”
This statement can only be assessed on an umbrella by umbrella basis. We speak to many temporary workers who are looking to switch from another provider because they have received inferior service. So, it’s true that some umbrella companies probably don’t care about their clients.
From Churchill Knight Umbrella’s perspective, we make sure we do everything we can to provide our clients with a premier experience. We most certainly do care, and we do everything we can to make our clients’ experience with us as professional and efficient as possible. We’re also a member of the FCSA – and there is no better way to showcase our commitment to compliance within the industry. Therefore, our clients are genuinely in the safest hands.
“Umbrella companies are unregulated and unethical”
Compliant umbrella companies are not unethical – they’re providing a legal PAYE payroll service for their clients. And, they’re helping the government ensure temporary workers pay the correct amount of tax and NICs.
Some umbrella companies are unethical and unregulated – it’s true. To protect yourself from such companies, you should only consider engaging with members of the Freelancer and Contractor Services Association (FCSA).
The FCSA is the UK’s leading professional body, and they are dedicated to ensuring the supply chain of temporary workers is ethical and compliant. Effectively, FCSA accreditation is a seal of approval that an umbrella company is compliant, ethical and has its clients’ best interests at heart. Churchill Knight Umbrella is a member of the FCSA.
To obtain FCSA accreditation, umbrella companies must undergo a thorough audit and series of assessments. Then, only when all of their internal procedures have been reviewed and given the green light, FCSA accreditation is awarded. And, most importantly, accredited providers are required to undergo an annual review where they’re re-evaluated to ensure they remain compliant. I guess you could say that every member of the FCSA is heavily regulated!
“As my umbrella company, you’re obligated to furlough me and I deserve it”
The short answer
This statement isn’t fair. The lack of government clarification surrounding the CJRS and how it applied to agency and umbrella workers provided a significant headache for umbrella companies. After all, it’s been made very clear by the government that if mistakes are made, employers could be faced with substantial bills in the future. And, from Churchill Knight Umbrella’s perspective, we have thousands of clients, and therefore, an unexpected bill in the future could result in insolvency. But there is more to it. So please, read the longer answer below.
The long answer
To protect workers affected by the COVID-19 pandemic, the government introduced the Coronavirus Job Retention Scheme (CJRS), and the concept of furloughed leave. Because umbrella companies are legally the employer of their clients (even though they carry out their duties elsewhere), many questions were raised by temporary workers looking for support.
The deadline for furloughing employees has now passed (10th June). However, it’s essential to make one thing clear – umbrella companies (and all employers in the UK) were in no way “obligated” to furlough their employees. In fact, they had the choice whether or not they would offer furloughed leave to their staff, and there was absolutely no legal requirement for them do to so.
One thing that was made very clear from the beginning was the fact that the CJRS was written with permanent employees in mind – not agency or umbrella workers. As a result, the official government guidance has been challenging for umbrella companies to interpret, despite the fact it was amended several times.
Unsurprisingly, umbrella companies have dealt with the CJRS differently. Some decided against offering furloughed leave altogether. Some were very strict in who they classed as eligible for furloughed leave. And some chose to furlough their clients with 80% of the NMW, and not of gross earnings. Churchill Knight Umbrella decided to wait for additional government clarification, but after a significant amount of time, it became clear that it wasn’t coming. Therefore, we engaged with employment and legal experts and decided to interpret the existing guidance to the best of our ability. We always wanted to offer support.
As a result, we individually assessed all of our clients legally and ethically and were able to offer furloughed leave to those who were eligible.
This article has set out to address some of the most concerning questions we have been asked, or we have come across online. A majority of umbrella companies in the UK are operating legally, ethically and have their clients’ best interests at heart. But unfortunately, there are some rogue umbrella companies out there, and they’re giving the industry a bad name.
There are plenty of sources of inaccurate and biased information – especially online groups claiming they’re trying to help contractors and freelancers. If you come across one of these groups – look closely. Is the group impartial, or is it being run by a contractor accountant? We have noticed a number of these groups are run by accountants who are frustrated with off-payroll legislation.
Don’t believe the fake news that is being spread about umbrella companies, and remember, the following is true about all compliant umbrella companies:
- They operate legally and in line with HMRC rules and regulations.
- They are not in any way trying to impact their clients negatively – they are merely providing a payroll service. Umbrellas are the chosen payroll service for thousands for recruitment agencies and organisations.
- They send your tax and NICs to HMRC directly on your behalf.
- They will not steal your money, and the only income they generate is via their margin.
- They are not able to cover employment costs because their clients don’t work for them. If they did, they won’t exist because they’d be operating at a loss from day one.
- They operate PAYE, and you are likely to retain between 60% and 70% of your earnings. Individual circumstances will vary.
- They will provide you with an accurate and tailored take home pay projection.
- They make every deduction to your pay very clear on your payslips.
- They do not promote tax avoidance in anyways.
- They legally have to enrol you into a pension scheme after 12 weeks, but you can opt-out if you prefer.
- They were not obliged to furlough any of their clients, but many did – despite a lack of government clarity.
- They are likely to be accredited by a professional body, such as the FCSA or Professional Passport.
Have any questions?
Please do not hesitate to get in contact with us if you have any questions. You can call us on 01707 871622, or contact us here. If you are interested in getting a quick and tailored take home pay projection, click here to request one now.
Founded by an IT Contractor in 1998, Churchill Knight has become one of the most respected contractor accountants in the UK. We’ve helped over 20,000 contractors with their accountancy requirements. As well as our accountancy services, we also have an industry-leading PAYE umbrella company and dedicated in-house personal tax department. Whichever service you choose, you can move forward with complete peace of mind. We are proud of the reputation we’ve built over the years, and our FCSA accreditation proves how committed we are to compliance within our sector. Keep reading…