Top 10 signs of umbrella company compliance

Contractors are forever told to make sure that they find a “compliant” umbrella company to work with. But in reality, what does ‘compliance’ mean, or even look like?

Ask one person this question, and you might get a completely different answer to what a second person will tell you! Well, as a person who owns and runs an umbrella company, here are my Top 10 signs of umbrella company compliance, writes Lucy Smith, managing director of Clarity Umbrella.

1. The umbrella does what HMRC says it should do!

Positively, HMRC has made quite a good stab over the years at defining what umbrella company compliance entails. And it even updated its take this year, covering payslips; getting paid and other key details when working through an umbrella company.

So your first port of call is to check your umbrella’s approach, activities, deductions and operations correspond to the Revenue’s eight-part guidance.

2. The umbrella has a genuine, valid, industry accreditation

When trawling through a potentially large offering of umbrella companies, a sound starting point is to more strongly consider those businesses which have industry accreditation.

Yes, there may be commentators and even contractors themselves who have their doubts on accreditation, but I personally think you’re safer off looking for some standard in the umbrella company which you use.  

Most umbrellas will have been assessed by external parties, to check they comply with both tax and employment law.

My tip here is to make sure that they do actually have the accreditation -- it is very easy to just grab a logo and put it on your website without it being legitimate or valid! Check the accreditor’s website; make sure the accreditor itself is bonafide, and then check the accreditor lists the brolly. You can always contact the accreditor if anything is unclear.

Also, be aware that a lot of recruiters will specify that accreditation is a pre-requisite, meaning without it accreditation the agency may refuse you the opportunity to work with the umbrella.

3. The umbrella’s take-home pay – it’s reassuringly uninflated

The key identifier to umbrella compliance is take-home pay.

Generally speaking, if you are a 40% rate taxpayer then via any compliant umbrella company, the net take home-pay into your bank account would be around 52-58%.

Any company that is offering a higher percentage is definitely doing something untoward!

So, to reiterate my guidance from many moons ago, the only difference in take-home from one brolly to the next should be the margin which they take and, even then, this should affect the tax and NICs by only a few pounds here and there.

Be aware, there are still many ‘umbrella companies’ out there offering 80%-plus in terms of take-home pay. These companies will undoubtedly lead you straight onto a cunningly disguised tax avoidance scheme.

4. The umbrella’s up for payslip sharing, and look, there’s that taxed bonus!

Another good indicator of compliance is to ask for a payslip and instantly be given one. But, once it’s in your hand, remember that many compliant umbrella companies do base their payslips on a basic pay (usually the Living Wage), plus a bonus. Crucially, with a compliant umbrella company, this bonus is taxed fully through PAYE, whereas the avoidance schemes which you want to avoid will not tax the bonus element, and hence it will enable them to offer a higher take-home.

5. The umbrella’s Apprenticeship Levy is present and correct

When you get your calculation, do keep an eye out for the Apprenticeship Levy figure.

The ‘AL’ is essentially a tax placed on any business with a payroll figure of over £3 million, and it comes off the ‘assignment rate’ in the same way as the Employer’s National Insurance.

If you find an umbrella with no Apprenticeship Levy being deducted, then it may not necessarily be an indication of non-compliance. But -- it would be a good indicator that you’re dealing with a relatively new umbrella company. Most companies, even with lower numbers of contractors, very quickly hit that £3 million threshold. 

6. The umbrella doesn’t have red flags on Companies House

Take a moment to run your own ‘due diligence’ checks on your likely umbrella company, remembering that the brolly is going to be managing your money!

On Companies House, you’re looking for anything untoward, that suggests your money is not going to be safe. Definitely take a good glance at the company’s directors; do they have a long, unfortunate-looking history of other umbrella companies, or similarly failed businesses, behind them? Try to look behind the scenes with the brolly you’re eyeing; that’s where the red flags tend to be found.

7. The umbrella isn’t ‘named and shamed’ by HMRC

To most contractors this one will be a no-brainer, but for the avoidance of doubt I’ll recommend it anyway!

Check HMRC’s list of named tax avoidance schemes, to ensure your preferred brolly isn’t on the blacklist. Be aware, though, the list’s entries get deleted after 12 months. Nonetheless, cross-check the names and addresses with your umbrella’s particulars, and keep yourself as safe as possible by checking the arrangements described on the HMRC list don’t mirror the arrangements you’re about to enter into.

8. The umbrella isn’t named on an HMRC stop notice

Not all subjects of HMRC stop notices are identified by name, but check that the umbrella company you’re considering contracting through isn’t one of those which is. Again, the arrangements outlined by HMRC on its current list of stop notices need to not sound familiar!

9. The umbrella is reviewed well and recommended by top advisers you trust

The words of other people you know in the contractor industry may be less reliable than chartered, established or well-regarded advisers, but of course neither is a guarantee of compliance. But a bit like umbrella company reviews online, and even contractor forums, it’s worth checking in with this as a source, simply to get a steer on your umbrella’s backstory (which, be prepared, could even include case law). So, enquiring with the people or places you trust about umbrella malpractice should probably be part of any decent attempt to stay away from it!  

10. The umbrella is upfront, transparent, law-abiding and fair on holiday pay

An umbrella company must allow you to have holiday pay but be aware this comes out of the assignment rate offered, and is likely to be calculated as a percentage of the taxable salary for the hours worked.

Many brollies now offer the flexibility to have holiday pay advanced each pay period or accrued. If you choose to accrue the holiday, do check the contract of employment to make sure that you know what happens with any unused holiday pay.

How the umbrella company operates holiday pay will be stated within the contract so take the time to have a thorough read. You need to know what to expect, and understand if you need to take any action prior to the end of their holiday year, to ensure you don’t lose any of your hard-earned cash.

The future...

You might not need all 10 of these to spot umbrella company compliance, or non-compliance! But, as a rule of thumb and to stay safe, check for accreditation, check your take-home pay and check your contract of employment, while doing your own due diligence on the business you are going choose to entrust your money with. Oh and this ‘Top 10’ should hold you in good stead until long-awaited regulation of contractor umbrella companies is introduced. There are optimists who feel this Wednesday’s Autumn Statement 2023 could take us a step closer to that holy grail although the actual legislation isn’t going to be with us any time soon.