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First Time Working Through an Umbrella Company? Here's What You Need to Know

First time working through an umbrella company?

As we adapt to ‘the new normal’ many of us are looking for different ways of working – this may include becoming a contractor who works through an umbrella company, as opposed to being employed directly by a company. If you’re considering this style of working, or have made the choice and now need some further guidance, we can help.

What is an umbrella company?

The very simple definition of an umbrella company is a company that employs contractors to undertake temporary assignments. These assignments take the form of continuous contracts of employment.

The Industrial sector accounts for the largest hirer of contractors, with 37 percent of all temporary workers, followed by clerical and administrative roles at 28 percent, STEM and managerial roles at 13 percent, and temporary health care workers at 9 percent.

This is a large proportion of the working population who now work through umbrella companies for an end client, and whose salaries are paid PAYE, in exactly the same way as a traditional employee.

However, not all umbrella companies are equal and, with the sector not currently regulated, some are not compliant with employment and tax law.

Let’s take a look at what you must look out for before signing up with an umbrella company.

What are my contractual terms and employment status?

Because every umbrella company is different their contractual terms differ too. You are strongly advised to read and be aware of the key terms within these contracts, and if you do not understand them, seek advice from a reputable source. Fundamentally, the company must comply with employment law.

When you sign a contract with an umbrella company you become their employee although you still have the independence of a contractor, meaning that you’re free to work when and where you choose. This means that you have the same employment rights as any other ‘traditional’ employee. These rights include benefits such as statutory benefits (sick pay and maternity/paternity pay) as well as auto-enrolment into a pension, should you qualify for one. An additional benefit of working through an umbrella company on a series of assignments is that you have continuity of employment which is important if you need to obtain a mortgage or a loan.

How will I be paid?

You will be paid through PAYE, with your tax and National Insurance deducted at source. If you’re employed through an umbrella company and are undertaking work on behalf of an agency the umbrella will receive the full PAYE rate together with all the ‘associated employment costs’ that the agency has received from the end client – the ‘Limited Company’ or ‘Uplifted Rate’.

Trustworthy umbrella companies will explain exactly what rates of pay you can expect to receive and will provide pay comparisons for you to help you understand the costs involved.

What benefits can I expect to receive?

As you are regarded as an employee of the umbrella company you are entitled to the following benefits:

  • Holiday Pay – umbrella companies provide a minimum of 28 days’ paid holiday, including Bank Holidays, as part of your contract

  • Sick pay – you are entitled to Statutory Sick Pay (SSP) if you fit the qualifications laid down by the Government

  • Auto-enrolment into a pension scheme – if you qualify you will be automatically enrolled into a pension scheme. Please seek independent financial advice about the amount you expect to receive upon retirement, and when you qualify to receive it

  • Maternity/Paternity pay – providing you qualify for Maternity or Paternity pay, you are entitled to receive it while employed in an umbrella company

How do I make sure my umbrella company is compliant?

Unscrupulous umbrella companies may be operating as a disguised remuneration scheme. HMRC takes such schemes in a very dim light and they are to be avoided. Signs that you may be engaged in such a scheme include promises that you can retain over 80 percent of your salary and still be tax compliant, having only a small proportion of your salary paid through payroll and be subject to PAYE, being paid through a loan, credit of investment payment which the company claims is not subject to tax or NI (this is classed as tax avoidance) and finally if the payment you receive from your umbrella company originates through a number of other companies.

For clarity, HMRC views tax avoidance as a very serious offence and it is imperative that you ensure that the umbrella company you choose is fully tax compliant. You are strongly recommended to seek independent advice about the compliance of any umbrella scheme before signing up with one.

Umbrella companies are a viable alternative to the traditional route of full employment in an organisation and are rapidly gaining in popularity. If you are considering working through an umbrella company, do your research, ask pertinent questions and look out for red flags which could indicate that all is not right.

If you're looking to work with a provider that’s earned a legitimate seal of approval, head to the Professional Passport Approved Providers list.

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