Guide to Choosing an Umbrella Company

The simplest and safest way of accepting a short contract as a temporary worker is to bring the arrangement to an umbrella company – but not all umbrella companies are the same.

How do you safely choose the right company?

Whilst all umbrella companies serve the same function, not all operate in the same way.

Some companies calling themselves umbrellas are not really umbrellas in the strict sense of the term. Any company that requires you to own shares with unequal or no voting rights or to become a director is not truly an umbrella company and puts you at risk of having to pay additional taxes and fines, or worse. These companies are “composite companies” – it’s a bad move for many reasons, not least the risk of Deemed Employee status under IR35. Look instead for a company where you are simply an employee of the umbrella. This limits your liabilities.

Some companies operate abroad and use off-shore bank accounts. Take great care if signing up with such an employer. Any company that uses an Employee Benefits Trust or makes use of the Double Taxation Treaty is not an umbrella company and is risking your livelihood. Contact us before you sign and we will help you to understand the risks and navigate the waters safely, free of charge.

Of the remaining companies who comply with these basic requirements in their structure to qualify as an umbrella company, there are still many factors to consider.

Does the company limit the range of expenses you can claim more tightly than the law allows?

If so then you will miss out by paying more tax than necessary. An umbrella company that understands the law will allow you to claim all legitimate expenses.

Does the company allow employees to claim false expenses by wrongly using a “dispensation”?

Even though you might make no false claims, if other employees do, it puts your contract income at risk, because HM Revenue and Customs can obtain a court order to seize your money to pay other employees’ taxes. To claim an expense, any employee must first spend the money, and he or she must do so wholly, necessarily and exclusively in performance of a contract. This restriction is not easy to understand and we can help. The restriction applies to all companies, not just umbrella companies.

A good umbrella company will check expenses claims in accordance with HMRC guidance and will tell employees if they find and reject an invalid claim.

Does the company have comprehensive insurance against all risks?

If not, then a claim as a result of accidents or mistakes by another employee risks your livelihood, because a court may order that a company settles a claim against it, and the company may have no choice other than to use your contract income.

Does the company withhold your holiday pay?

Any umbrella company that does not pay you every penny you have earned immediately they receive it is benefiting from your work unfairly. They could be risking your money on operating costs or other ventures, and will certainly be earning or saving interest using your money. An honest company will pay you in full, immediately.

Does the company take a day or more to settle your wages?

If not, this suggests their office is not efficiently managed. An umbrella company with the right technology should have no difficulty in paying you the same day that payment is received from the client, subject to cut-off times in the banking system.

Do they calculate Employer’s National Insurance based on your Contract Income?

Some umbrella companies do not understand the law on Employer’s National Insurance and calculate it wrongly. If the company talks about “refunding the difference”, or deducts the amount from the taxable salary rather from the contract income, not only are they overpaying National Insurance, but they are putting your contract income at risk because a court may order National Insurance to be refunded to another employee using your money. Ask whether they deduct Employer’s National Insurance from taxable salary. The answer should be ‘no’ and the consultant should be able to give you a full explanation.