There seem to have been lots of comments on here lately from people who are working through 'umbrella companies' but are concerned about visits from HMRC, are taking home 90% of their earnings, don't understand their contracts, don't know their employment status etc etc etc.
So I thought I'd sum up what you should expect when you work through a proper, compliant umbrella company:
They should explain exactly how they work before you sign up with them - you should expect an advisor to take your call rather than a salesman. If they promise that you'll be better off working with them but can't explain how or why then it's likely that they're operating a tax avoidance scheme and not running an umbrella company. Sky high take home pay is appealing, of course it is, but, if you're tempted, have a read: HMRC Scheme Enquiries. Contractors have been suckered by companies promising the earth and are now suffering at the hands of HMRC - bankruptcy, divorce, depression, even suicide.
If you ask for an illustration of your take home pay they should ask your rate and whether or not you will be incurring any costs which may be allowable as expenses. They should not make any assumptions regarding expenses and they should explain that, if you only work on a single assignment whilst in their employment, you will have no entitlement to travel and subsistence expenses. What can and cannot be claimed as an expense is determined by HMRC and not the umbrella company so ignore companies that promise you can claim more if you work with them.
The umbrella company should not give you a tax benefit from 'expenses' when you have not incurred the cost - this is referred to as 'salary sacrifice', a practice which has been attacked by HMRC with significant results Umbrella companies beware - the travel expenses and salary sacrifice trap | DWF
You should be paid via PAYE with deductions made for Income Tax and Class 1 National Insurance Contributions and the umbrella company should be able to explain how the PAYE system works. If you receive your first payslip and you don't understand it, there should be someone at the company who can explain the calculations to you. If they can't then you should probably look for another umbrella company.
As an umbrella company is an employer, they have to work under the same rules as any other employer:
They will have to pay Employer's National Insurance contributions on your salary to HMRC. Your salary is calculated as the contract rate, which is invoiced by the umbrella company to the agency/client less the umbrella company's margin less their NI contributions.
If the umbrella company is over a certain size, they have a legal obligation to operate a pension scheme under auto-enrolment. They have no alternative but to enrol you into their scheme but you do have the option to opt-out should you wish to.
They should pay holiday pay when you take your holiday (rather than including an element of it in your weekly/monthly earnings). As an umbrella company's only income is their margin (typically £25-£30 per week) it is impossible for them to pay holiday pay in addition to your salary as this would involve producing money out of thin air. Therefore, in order to comply with the EC Working Time Directives, they will usually deduct a small amount from your salary which is then accumulated and paid back to you when you take holiday - this money does not belong to the umbrella company so, if you don't take all your holiday, the balance should be paid back when you leave their employment.
If your contract rate is low then an umbrella company may not be a viable option for you as your salary may fall below minimum wage which means that the umbrella company would be breaking the law if they were to employee you. As a general rule of thumb, if the contract rate is anything less than about £8.50 per hour it may not be an option for you.
You will be the umbrella company's employee and therefore you should be engaged by them under a Contract of Employment. You should read the contract carefully and only sign it if you are happy with the contents. It should be signed before you begin your first assignment. If the umbrella company tells you that you'll be paid PAYE but you won't be their employee they are probably operating an Elective Deductions Model (EDM) Elective Deduction Model (EDM) tries to avoid false self-employment rules, HMRC told :: Contractor UK which was developed to avoid the Onshore Intermediaries Legislation.
The umbrella company will sign a business to business contract with the agency/client - you should not be expected to sign this document but you should expect your umbrella company to send you details of the assignment before you start work.
There should be no 'additional costs' such as insurance or money held back for Statutory payments such as sick pay or maternity pay; that's the umbrella company's liability.
If there are any deductions shown on your payslip that you don't recognise, the umbrella company should be able to give you a clear, concise explanation - if they umm and argh there's something wrong.
In short - NO umbrella company can promise to 'maximise your earnings' or 'increase your take home' without breaking or, at the very least, bending the rules which puts you at risk of a visit from HMRC some time in the future. Look for a company that is open and transparent about the way they work.
We are all happy to answer questions about umbrella companies but, if they're doing their job well, we shouldn't need to
So I thought I'd sum up what you should expect when you work through a proper, compliant umbrella company:
They should explain exactly how they work before you sign up with them - you should expect an advisor to take your call rather than a salesman. If they promise that you'll be better off working with them but can't explain how or why then it's likely that they're operating a tax avoidance scheme and not running an umbrella company. Sky high take home pay is appealing, of course it is, but, if you're tempted, have a read: HMRC Scheme Enquiries. Contractors have been suckered by companies promising the earth and are now suffering at the hands of HMRC - bankruptcy, divorce, depression, even suicide.
If you ask for an illustration of your take home pay they should ask your rate and whether or not you will be incurring any costs which may be allowable as expenses. They should not make any assumptions regarding expenses and they should explain that, if you only work on a single assignment whilst in their employment, you will have no entitlement to travel and subsistence expenses. What can and cannot be claimed as an expense is determined by HMRC and not the umbrella company so ignore companies that promise you can claim more if you work with them.
The umbrella company should not give you a tax benefit from 'expenses' when you have not incurred the cost - this is referred to as 'salary sacrifice', a practice which has been attacked by HMRC with significant results Umbrella companies beware - the travel expenses and salary sacrifice trap | DWF
You should be paid via PAYE with deductions made for Income Tax and Class 1 National Insurance Contributions and the umbrella company should be able to explain how the PAYE system works. If you receive your first payslip and you don't understand it, there should be someone at the company who can explain the calculations to you. If they can't then you should probably look for another umbrella company.
As an umbrella company is an employer, they have to work under the same rules as any other employer:
They will have to pay Employer's National Insurance contributions on your salary to HMRC. Your salary is calculated as the contract rate, which is invoiced by the umbrella company to the agency/client less the umbrella company's margin less their NI contributions.
If the umbrella company is over a certain size, they have a legal obligation to operate a pension scheme under auto-enrolment. They have no alternative but to enrol you into their scheme but you do have the option to opt-out should you wish to.
They should pay holiday pay when you take your holiday (rather than including an element of it in your weekly/monthly earnings). As an umbrella company's only income is their margin (typically £25-£30 per week) it is impossible for them to pay holiday pay in addition to your salary as this would involve producing money out of thin air. Therefore, in order to comply with the EC Working Time Directives, they will usually deduct a small amount from your salary which is then accumulated and paid back to you when you take holiday - this money does not belong to the umbrella company so, if you don't take all your holiday, the balance should be paid back when you leave their employment.
If your contract rate is low then an umbrella company may not be a viable option for you as your salary may fall below minimum wage which means that the umbrella company would be breaking the law if they were to employee you. As a general rule of thumb, if the contract rate is anything less than about £8.50 per hour it may not be an option for you.
You will be the umbrella company's employee and therefore you should be engaged by them under a Contract of Employment. You should read the contract carefully and only sign it if you are happy with the contents. It should be signed before you begin your first assignment. If the umbrella company tells you that you'll be paid PAYE but you won't be their employee they are probably operating an Elective Deductions Model (EDM) Elective Deduction Model (EDM) tries to avoid false self-employment rules, HMRC told :: Contractor UK which was developed to avoid the Onshore Intermediaries Legislation.
The umbrella company will sign a business to business contract with the agency/client - you should not be expected to sign this document but you should expect your umbrella company to send you details of the assignment before you start work.
There should be no 'additional costs' such as insurance or money held back for Statutory payments such as sick pay or maternity pay; that's the umbrella company's liability.
If there are any deductions shown on your payslip that you don't recognise, the umbrella company should be able to give you a clear, concise explanation - if they umm and argh there's something wrong.
In short - NO umbrella company can promise to 'maximise your earnings' or 'increase your take home' without breaking or, at the very least, bending the rules which puts you at risk of a visit from HMRC some time in the future. Look for a company that is open and transparent about the way they work.
We are all happy to answer questions about umbrella companies but, if they're doing their job well, we shouldn't need to
