With so many umbrella companies operating in the UK, determining which company is legitimate and which is promoting a tax avoidance scheme can often take time. This article summarises the importance of using a compliant umbrella company and outlines the top tips to help you identify which provider to use.
Over the years, HMRC has introduced legislation to try and stop tax avoidance, including the 2019 Loan Charge, and has shown they are taking a strict approach on anybody who has used a tax avoidance scheme in their pursuit to reclaim unpaid taxes. If you use a compliant umbrella company for your payroll, you'll pay the correct amount of tax and National Insurance Contributions (NICs) to the government. The umbrella company will ensure all deductions to your salary are correct and calculated per UK tax law. However, if you engage with a non-compliant provider, you will not be paying the correct taxes and will likely face an HMRC tax investigation, which could have serious consequences.
The government's website has lots of helpful information about tax avoidance schemes, the risks of using a tax avoidance scheme, how to identify a tax avoidance scheme and how to report a tax avoidance scheme. We recommend you familiarise yourself with the information on the government’s website. The government has also created a list of tax avoidance schemes which is regularly updated. For the latest list or to check if a company you have or are considering using is on the list, please visit the government's website.
Unfortunately, tax avoidance schemes are still very operational within the UK, and it is now more important than ever to only use compliant umbrella companies for your payroll. Below is a carefully curated checklist to help you identify a compliant umbrella company.
Do they operate Pay As You Earn (PAYE)?
All compliant umbrella companies will process payroll in the same way – PAYE. PAYE is HMRC's tax system and will ensure employees pay the correct amount of tax and NICs. If you ever come across an umbrella company promoting an alternative payment method, such as via a job board or loan scheme, avoid them at all costs, as these are tax avoidance schemes.
Are they accredited?
Umbrella companies are not regulated by the government and hence having an accreditation can help. Recruitment agencies and contractors recognise two professional bodies for ensuring the supply chain of temporary workers is compliant - the Freelancer and Contractor Services Association (FCSA) and Professional Passport. To obtain accreditation by the FCSA or Professional Passport, umbrella companies must pass a strict audit to ensure their operations comply with UK tax law and the individual body's compliance standards. You must also conduct your due diligence before registering with any umbrella company to ensure they are operating legally and compliantly.
Do they provide you with a clear and accurate take home pay illustration?
All compliant umbrella companies will process your pay in the same way – via PAYE. The only thing that will differ between compliant umbrella companies is the margin they retain, and even then, this will only impact your take-home pay by a couple of pounds. Therefore, you should expect to retain around 60-70% of your salary after tax deductions. A compliant umbrella company will provide you with a take-home pay illustration before you register with their service. It will clearly show a breakdown of all deductions you can expect when you get paid.
It is essential to highlight that some umbrella companies may choose to pay the National Minimum Wage rate for all hours worked and then make up your total rate with an additional payment, such as a bonus. Tax will still be paid on the additional payment, and your payslip and illustration will show this against all the hours you have worked or are expecting to work. Please visit the government's website for more information about how you will be paid and the deductions you can expect when working through an umbrella company.
If you receive an umbrella company illustration offering a significantly higher take home pay than expected, please be wary. While it may be tempting to use the umbrella company that gives you the highest take home, always consider how they've come to the figure they are offering you and whether the correct deductions have been applied.
Do they provide legitimate employee rights and benefits?
As an employee of an umbrella company, you have the same statutory employment rights as other employees. However, if you use a non-compliant provider, they are unlikely to offer you these employment rights, which could leave you in a vulnerable position. Additionally, you must ensure that any benefits the umbrella company provides you as part of your employment are legitimate and legal. For example, this could include, Same Day Faster Payments, dedicated account teams or a free insurance package.
Have they been issued with a Scheme Reference Number (SRN)
Once HMRC discovers a tax avoidance scheme, they'll issue it with an SRN. Before registering with an umbrella company, it's worth checking that the company you are considering has not been given an SRN. Unfortunately, the Directors of these tax avoidance schemes often disappear once an SRN has been issued. If the government cannot find those responsible for operating the scheme, they will go after the contractors who engaged with the scheme to reclaim the unpaid tax.