How to set up a UK umbrella company

‘How to set up a UK umbrella company?’ It’s a question I should be well-placed to answer, given that only four year ago, I made the decision to do exactly that -- set up my very own umbrella company from scratch, writes Lucy Smith, founder of Clarity Umbrella.

I need to caution you before you read on, however! In my situation, I arrived at the actually not-altogether-easy decision to launch an umbrella company with 10 years’ experience in the industry, mostly at the coalface of a contractor umbrella company. So you’d think just going a step further and making a brolly mine would be simple. You can rest assured it is (and was) far from simple! 

Pressures you'll face setting up an umbrella company

Changes to the IR35 legislation have surged the number of umbrella companies getting formed in the UK.

And with that, for an industry already not greatly respected, came (ongoing) concerns over the compliance of these new umbrella businesses.

That’s absolutely not to say that the assumption should be that a new umbrella company is doing things incorrectly or non-compliantly. But there is much more to running an umbrella than most people think.

'It's just payroll, right?' Wrong...

On many occasions I have heard comments like “it’s just payroll, or “it’s just clicking a few buttons.” With the utmost certainty, I can promise you that to run a umbrella company -- compliant with rules laid down by HMRC, Companies House, DTI and other government bodies, it’s far from just either of those things.

So here are 10 top considerations on how to set up an umbrella company.

These consideration come not from an SEO copywriter, but from someone who’s actually been there, done it, and got the contractor sign-ups from contractors who appear pretty happy with our offering! That said, as I will come onto, there is always room for improvement!

1. Be across at least three legislative areas

The basics of an umbrella company time and time again require an understanding of tax law, employment law and contract law. And for those that don’t know, unfortunately none of these three separate strands exactly sit comfortably together! If in your eyes this trio looks opaque, you’ll need an adviser in your corner who’s across all three.

2. Know payroll, and then master reverse calculations

To the point I made earlier, yes, we do indeed do payroll!

So to set up an umbrella company, you need an unfaltering understanding of a payroll function.

But it goes far deeper than that. Reverse calculations for employment costs, the bit of ‘payroll magic’ that happens to ensure deductions from the ‘assignment rate’ are taken correctly, are something you’ll need to master.

In my 14-plus years in the umbrella industry, I have seen this calculation done INCORRECTLY on NUMEROUS occasions. The problem is; the company doing it wrong simply knows no different because, there is simply no handbook to say otherwise! 

3. Become an employer

As an umbrella company, you will act as the ‘employer.’

So you must know your duties as a UK employer, your responsibilities, and legal obligations.

This extends to you considering pensions and knowing where and when your pension obligations apply. Plus there are other statutory obligations which all UK employees are entitled to and related, as an employer, you’ll have a ‘duty of care’ to your staff – who, to confuse matters, will often identify themselves as ‘contractors’!

Further consider that things don’t always run smoothly in the umbrella contracting world. So as an umbrella employer you have to take responsibility, and this may result in legal cases for you to represent. 

4. Learn all key frameworks and umbrella company legal requirements.

Where to start with the seemingly endless rules governing umbrella companies?!

So ok, you’re learning about the three fundamental areas (recommended in 1) before you set up your own umbrella company. But there are ongoing changes to legislation which need to be tracked and adhered to by umbrella companies on a weekly basis.

Oh, and every umbrella company needs to be on top of this almost continual stream of regulations from government on umbrella working.

Further legislation affecting umbrella companies is also being mooted in a government consultation which I met HM Treasury yesterday to discuss, with a view to the new legislation being introduced from April 6th 2024.

But let’s get you started with some bedtime reading. To set up and run an umbrella company compliantly, you’ll need to understand, reflect and comply with (as a minimum):

• The Employment Rights Act.
• The Agency Worker Regulations.
• The Conduct Regs.
• The Pensions Act.
• HMRC employment manuals/ and HMRC updates.
• IR35, and the Off-Payroll Working Rules of April 6th 2017 and April 6th 2021.
• The Travel & Subsistence rules, including the SDC test.
• The Apprenticeship Levy.
• The GDPR.
• VAT.
• The Criminal Finance Act.
• Right to Work.
• Modern Slavery rules.
• Key Information Documents.
• Holiday Pay regulations. 

5. Train yourself to speak a whole new language

I touched on terminology earlier and this may sound trivial, but terms used and choice of language have caught out many an umbrella company, leading to confusion for employees and subsequently, at employment tribunals.

I’d go so far as to say that how an umbrella company explains the way in which it operates could be the downfall of its business.  

6. Get a compliance badge

To compete as an umbrella company in our fiercely competitive industry, you can claim to do things compliantly, but the reality is that without a “badge” -- formally known as ‘accreditation’ -- you will make your company’s life incredibly hard.

And if the current umbrella consultation is anything to go by, acquiring a badge is going to become more important than ever. Notably, if the ‘debt transfer’ proposal becomes part of the incoming legislation, then the agencies your umbrella engages with are going to need some security and reassurance that they are not carelessly exposing themselves to risks by engaging with you. 

7. Brace yourself for competition, unevenness, and major players

The umbrella marketplace has long been dominated by a handful of very ‘big names,’ which has caused a slightly, unlevel playing field for any new umbrella company looking to enter the market.

It is tough out there as a new umbrella. The profit margin for an umbrella looking to operate on a ‘whiter than white’ basis is slim, and without sign-ups, the journey can look and feel even harder. 

8. Realise reputation matters (massively in our case)

For our umbrella business, reputation has been the key to our growth alongside trust, honesty, and openness.

As I said at the start, the umbrella industry has been criticised so much over the last  decade, largely due to the amount of non-compliance, meaning doing things correctly is crucial if you want to succeed. 

9. Persevere, practice patience and plough on

My business took four years to get where it is today. And we could still be better and are always looking to improve! So running an umbrella company isn’t easy, meaning you’ll have to block out the haters, simplifiers (‘it’s just payroll) and most of all, you’ll need to have the resilience and patience to plough on when it seems everyone is against you!

10. Be prepared to face (and pay) the tax consequences if you slip -- or cheat

Finally, us umbrella companies are essentially working for HMRC, collectively collecting millions in taxes for the tax authority each month. So, if you don’t get your new umbrella company set-up right, or cut corners once you’re up and running, then on top of all the worries outlined above, you’ll have the taxman on your back too!