The risks of working for an umbrella company – what you need to know

Recruitment agencies often use umbrella companies to pay temporary workers. An umbrella company can be loosely defined as ‘a company that employs workers who work for different end clients.’ Here, it’s the umbrella company who enters into a contract with a recruitment agency, not the worker. In effect, umbrella companies act as middlemen temporarily employing individuals who agree to provide their services to end users.

Following the clampdown on the use of personal service companies under IR35, the number of umbrella companies has increased. Using an umbrella company to employ the individual and account for income tax and National Insurance contributions means IR35 is effectively no longer relevant.

How does it work?

An organisation needs a temporary worker. They contact a recruitment agency; the agency then pays the umbrella company the assignment rate. The umbrella company employs the worker and pays them through PAYE, after deducting overheads such as:

👉Its administration fee

👉An amount to meet their employer’s NIC

👉Holiday payments

👉Allowable expenses.

The remainder of the payment is paid to the worker as gross pay, subject to income tax and employee NI.

What was that about a risk?

Some umbrella companies operate tax avoidance arrangements, known as disguised remuneration schemes. This involves an umbrella company making some or all of an individual’s pay in the form of a loan, salary advance, grant, annuity or any other payment. The individual is told that the loan, for instance, is non-repayable and non-taxable; in reality, though, it is taxable!

The worker may be asked to sign an employment contract with the umbrella company and a separate agreement. The agreement document will often be a confirmation that the worker agrees to a loan from the umbrella company or maybe another agreement that attempts to disguise some payments as non-taxable.

Many workers have limited choice over whether to contract with an umbrella company, or the specific umbrella company they can contract with. Additionally, many umbrella companies deny employment rights and use the format to reduce income tax and NIC.

HMRC is aware of some umbrella companies charging the worker for their services (including processing pay) and/or directing workers to use umbrella companies in which they hold an interest. Following recognition of an increased number of such schemes, HMRC has set up a special department to investigate such practices.

What to do if you need to work for an umbrella company

👉One way to check if an umbrella company is compliant with the regulations is to check they are NOT on HMRC’s Current list of named tax avoidance schemes, promoters, enablers and suppliers. However, this still doesn’t guarantee anything. We’re also told you can check whether the umbrella company has accreditation with the FCSA (Freelance & Contractor Services Association) or the UK recruitment trade body APSCo.

👉To find out how to check your pay when you’re employed by an umbrella company, read the HMRC’s webpage Working through an umbrella company.

👉 Check your payslip to make sure you’re not involved in a tax avoidance scheme.

📢❕The information in this blog post was correct at the time of writing. Please check with your accountant for the latest information or, if you don’t have an accountant, join the Financial Resilience Hub to get access to one of ours! Alternatively, keep an eye on HMRC’s website for updates.

ABOUT THE AUTHOR

Helen Monaghan is a Chartered Management Accountant, accredited NLP Practitioner & Finance Coach. Both a psychology graduate and an accountancy graduate, she has authored three business books, which beautifully bring together psychology, finance, and tax to empower the reader about money. Helen is the CEO of HM Finance Coaching & Advisory Ltd, a company that provides financial education and business mindset coaching to small businesses across the UK, in addition to accountancy services for limited companies in Scotland and across the UK. Helen is also the founder of The Financial Resilience Hub – find out how we can support you, and your business, to be financially resilient through our monthly membership.

© Helen Monaghan