If you’re a contractor, working through an umbrella company can save you many headaches: from tax, payroll, and insurance, to the dreaded IR35.
Unsurprisingly, as contracting has grown in popularity, so have umbrella companies. A quick search on Companies House turns up a whopping 161,972 results.
But choice creates its own problems. With so many umbrella companies on the market — all proclaiming they’re the best thing that’s happened to contracting since, well, the invention of contracting — how do you pick the right one?
Here are 20 things to consider.
1. Is an umbrella company the right choice for you?
Before you dive into the merits of different umbrella companies, it’s worth asking yourself: is an umbrella company even the way to go?
On the upside:
- Joining an umbrella company is easier, quicker, and cheaper than setting up your own limited company
- There’s less admin to do, because the umbrella company handles invoicing, credit control, payroll, and most other time-sucking tasks you’d have on your to-do list if you ran your own limited company
- You get sick pay, holiday pay, and other statutory benefits
On the downside, it’s not as tax-efficient as a limited liability company. And you’ll have less control over the way you work. You may well have no choice, either, if your client insists that you cannot contract via your own limited company due to the Off-Payroll rules.
2. What fees does the umbrella company charge?
Umbrella companies typically charge one of two ways: a fixed fee or a percentage fee. As the name suggests, a fixed fee is a set amount, usually taken weekly or monthly. A percentage fee is a cut of your invoices.
The good news is that the fee is deducted before the company calculates your taxable income, so you make some of it back in tax savings. The bad news is that both structures have their pitfalls.
Percentage fees are sometimes (but not always) capped. But they can still take a serious chunk out of your income, especially if you’re a higher earner.
With fixed fees, some companies advertise the net fee — the fee taking tax savings into account — not the gross fee. This makes them seem cheaper. But how much tax you’ll save depends on your tax bracket. So, in practice, they’re making it harder for you to compare.
3. Is there an introductory offer?
Some umbrella companies offer discounted or zero fees for the first few weeks.
If you’re new to contracting, this can be a great way to test the waters without too much financial risk. Do bear in mind, though, that the fees will eventually go up.
It’s worth checking what the fees will be once the introductory offer ends. Are they higher compared to what other companies charge?
You should also check whether there are any hidden fees. Which brings us to the next point.
4. Are there other fees to consider?
Fixed or percentage fee aside, some umbrella companies may also charge:
- Sign up fees
- Exit fees
- Surcharges for same-day payments
- Surcharges for insurance, expense processing, and other admin
Companies that don’t charge these fees may have higher weekly, monthly, or percentage fees. So it’s worth doing the maths to see what works out cheapest.
That said, don’t make it all about price.
Nobody likes paying fees if they can help it. At the same time, you get the quality of service you pay for.
5. What are the working conditions like?
An umbrella company should offer you what is called an ‘overarching contract of employment’. This means you get all the benefits of being employed, including:
- Sick pay
- Paid holidays
- Paternal leave
Your contract should also have a minimum number of guaranteed hours — at least one day a week, or 336 hours a year — and mutuality of obligation.
HMRC considers mutuality of obligation to exist where there’s “...an obligation by the one party to accept and do work if offered and an obligation on the other party to pay a retainer during such periods as work was not offered.”
6. How do I take my holidays?
As part of your contract, the umbrella company has to give you paid holidays. But how they go about this is up to them.
There are two options. The umbrella company can pay you an extra 12.07% of your gross salary. Alternatively, you can take paid days off. The current statutory leave entitlement is 28 days a year.
In 2019, a teacher successfully challenged the 12.07% method in the Court of Appeal by arguing it left her worse off. If you’re unsure what kind of holiday entitlement you’d prefer, this is worth considering.
7. What insurance do they have?
Because an umbrella company is effectively your employer, they must have employers’ liability insurance. This is a legal requirement for all employers, and it protects you if you become ill or get hurt on the job. The company can get fined £2,500 a day if they don’t have it.
Most clients won’t work with a company unless they see evidence of professional indemnity and public liability insurance. That said, umbrella companies tend to have blanket policies that may exclude less mainstream occupations. So if you work in a niche field, it’s worth double-checking you’re covered.
8. How soon will you be paid?
At the end of the day, we all want to get paid. And the best umbrella companies will make sure the process is as quick, simple, and stress-free as possible.
For starters, check how often they make payment runs. Good companies typically make several runs a week. Which means they should be able to pay you reasonably quickly after you submit your timesheets.
More importantly, look out for catches. Your contract shouldn’t have a ‘we’ll pay you when we’re paid’ clause, because that’s not appropriate in an employer-employee relationship.
9. How long will it take for the money to reach your account?
You can make online payments by BACS, CHAPS, or faster payments.
These days, pretty much everyone uses the faster payments system, so your payment should reach your bank account on the same day as the payment run (if not instantly).
Some umbrella companies will charge extra for this. But the faster payments system allows payments of up to £250,000 to be made 24/7 at no extra cost to recipients. So, put simply, there’s no good reason why they should do so, except to make a profit.
10. How often will you be paid?
Will you be paid weekly, fortnightly, monthly, or at some other frequency?
And will you get all your money, less income tax, national insurance, and other deductions like your pension? Or does the company also hold some of what you’re owed for ‘contingencies’?
11. How easy is it to get paid?
This is just as important as getting paid regularly and on time. The last thing you need is to have to jump through several hoops to submit a timesheet.
Steer clear of companies that require paper timesheets. In this day and age, you should be able to submit everything online with a few clicks and track progress.
You should also check whether there are any bottlenecks that could delay payment. For example, do timesheets have to go through an approval process before they’re paid? What does this process involve?
12. How will you get paid?
Because you’re the umbrella company’s employee, you should receive 100% of your income through PAYE (pay as you earn). This means that, their fee aside, any umbrella company should offer you the exact same take-home pay.
Sadly, some companies try to entice you by suggesting they can offer a more tax-efficient payment structure. Be especially wary of companies that offer to:
- Split your salary into two or more payments, with only one payment going through PAYE
- Pay you via a capital advance or share ownership agreement
- Make payment through an offshore structure
These schemes could leave you on the hook for back taxes, interest, and fines if HMRC decides to investigate.
13. What’s the company’s expense policy like?
Since April 2016, HMRC has significantly tightened the rules around what expenses you can claim through an umbrella company.
Typically, you can claim very limited expenses such as mileage, accommodation, and training costs. But only if you incur them ‘wholly and exclusively’ while doing your job. And if you’re under your client’s supervision, direction, or control, you can only claim in exceptional circumstances, for example because you travel as part of your duties.
The upshot is that you should be wary of umbrella companies that say you can save on tax by claiming a wide range of expenses. If it sounds too good to be true, it probably is.
14. Does the company claim it has ‘special dispensations’?
A dispensation is an expense for which the umbrella company doesn’t need receipts. This is because the amount is below a limit they’ve agreed with HMRC.
Let’s say the company has a dispensation for £100 on travel. If you claim £95, the company won’t need a receipt. But if you claim £120, they’ll need one.
Some umbrella companies say you can claim a wide range of expenses without receipts because they have a ‘special dispensation’. But this is misleading.
To begin with, the rules on what you can and can’t claim still apply, whether there’s a dispensation or not.
More importantly, while the umbrella company might not need a receipt, HMRC may still want to see it. And you could get in trouble if you can’t produce it without good reason.
15. What are the company’s pension arrangements?
Like any other employer, an umbrella company must enrol you in a pension scheme if you:
- Are aged between 22 and state pension age
- Work in the UK
- Make more than £10,000 a year
As from April 2019, the umbrella company should deduct at least 5% of your gross income for pension contributions. They should also contribute an amount equal to at least 4% of your gross earnings.
16. What’s the company’s reputation?
Not all umbrella companies are the same. While many are reputable and trustworthy, some treat contractors unfairly.
With this in mind, it’s worth googling umbrella companies you’re interested in and reading up on them. Find out how long they’ve been operating, how many contractors they have on board, and whether they’ve been featured on news sites (in a good or bad light).
Don’t read too much into reviews and comparison websites, though.
Comparison website rankings tend to vary wildly, with sponsors often getting the top slots.
As for review websites, it’s hard to separate legitimate reviews from ones that have been paid for, or posted by people with an axe to grind. A better way to go is to reach out to your network or ask for help in professional groups such as Freelance Heroes or the ContractorUK forum.
17. Is the company compliant?
Although umbrella companies are not ‘regulated’ by an official body, you should look out for accreditations they may have which demonstrate that they are compliant with tax regulations, and industry standards.
For example, are they members of the FCSA (Freelancer and Contractor Services Association)?
Being FCSA-registered means the company’s operations, policies, and processes, and the way it deals with contractors have been audited to make sure they meet certain standards.
The trade body also conducts financial stability assessments to confirm FCSA-registered companies are in good financial health.
Another organisation which undertakes audits of service providers to ensure that they are compliant is Professional Passport.
18. Does the umbrella company make misleading or meaningless claims?
Some umbrella companies claim they’re HMRC-approved or IR35-compliant. These claims sound impressive, but they’re meaningless.
HMRC cannot approve limited companies. At best, HMRC-approved means the company has a dispensation for some categories of expenses (as we’ve explained in 14. above).
Similarly, your IR35 status depends on your relationship with the end-client, not on how you’re paid. When you work through an umbrella company, you’re paid and taxed like an employee whether IR35 applies or not.
19. What’s their support like?
In an ideal world, you’d do your work, submit your timesheets, get paid, and laugh all the way to the bank.
Sadly, the world we live in is less than ideal. Sometimes there are disagreements with clients. Other times, you run into administrative issues. And when this happens, you’ll want to know the umbrella company has your back.
Do they have someone you can turn to for support and advice when things go wrong? And how easy is it to get in touch?
20. Is the umbrella company on your recruiter’s preferred suppliers list?
A growing number of recruiting agencies have preferred suppliers lists — an exclusive list of umbrella companies they’ll work with. This means that if you want to work with a particular agency or client, you may have limited choices.
Most recruiters will carry out due diligence before putting a company on their list, to make sure they’re trustworthy and reputable.
Nonetheless, being on a preferred supplier list doesn’t necessarily speak to the umbrella company’s reputation. The recruiter and the company may have an arrangement. And the recruiter may even be getting a referral fee.
With that in mind, you should still go through the other 19 items on this list.
Picking the wrong umbrella company could leave you out of pocket, get you in trouble with HMRC, and sour your contracting experience. So it’s worth doing your homework and weighing up the pros and cons before you scribble your signature on the dotted line.
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At ContractEye, we’ve been working with Umbrella Company UK — an FCSA-registered company with an excellent reputation — for many years.