The top 10 umbrella company checklist for contractors

There are times in the cycle of contracting where you may take an inside IR35 contract and use an umbrella company. Or you may use an umbrella if the limited company life is not for you!

Either way, navigating the world of umbrella companies can be a nightmare and so you’ll need a checklist, writes James Poyser, CEO at inniAccounts and founder of OffPayroll.org.uk.

Be aware, umbrella companies aren’t regulated and unfortunately, that means there are rogue companies operating, which may land you with a hefty tax bill. And being a ‘well-known’ umbrella company is not a silver bullet to these risks, and while many brollies operate compliantly, many brollies are also far from perfect -- with hidden costs and potentially even unscrupulous practices to cover expenses that their business model attracts.

So as a contractor, how do you find an umbrella who will treat you fairly? Here are ten things contractors should check before engaging an umbrella company.

1. Run a background check

Firstly, do your ‘due diligence’ and undertake research on the umbrellas you are considering. Check company, director and shareholder information on Companies House to ensure the umbrella company and related parties are not based in offshore finance centres, non-cooperative jurisdictions, or countries of concern. An umbrella registered in a known tax haven is a red flag.

Also, watch out for umbrella companies offering high rates of take-home pay. Similarly, anything that claims to be “HMRC approved” or “Barrister/QC approved” is pretty much guaranteed to be a scam. When it goes wrong, they won’t face a tax bill -- you will. Avoid.

Take action: Do your due diligence and undertake background checks on your umbrella company for signs of tax avoidance practices.

2. Get a KID from your agent

If you’re finding work via a recruitment agent, your agent must provide you with a Key Information Document (KID).

A KID is a document that’s designed to show you the complete flow of your pay in the employment supply chain -- from the agent to your pocket. Since April 2020, recruitment agents are obliged to provide a KID before you start an assignment with them. It should be provided early in your conversation with them, and before you sign a contract.

A KID will tell you:

• The flow of your income, from the agent to you, via any intermediaries.
• The rate of pay to the umbrella
• All umbrella deductions, both statutory and non-statutory, including Employer’s NIC, Apprenticeship Levy, holiday pay deductions, employer pension contributions (yes, unfortunately you read all these deductions correctly), plus the umbrella’s fee (their margin).
• All deductions taken from your gross pay (on your umbrella payslip), including income tax, Employee’s NIC, employee pension contributions, any paid-for benefits
• Any deductions -- one-off or recurring -- by any party in the chain, for example DBS check fees.
• Clarity on who your employer is -- both who will employ you, and who will pay you.
• The terms of your employment.
• A summary of your contract terms and any benefits -- your rates, holiday pay, pension schemes, for example.

If you have any doubts about the KID, you can ask the agent to provide you with a copy of the information provided by the umbrella. The agent must provide this to you within five days.

Take action: If you’ve not been given a KID, and you can’t resolve it with your agent then you can complain to the Employment Agency Standard - the government department responsible for the rights of agency workers. .

3. Check your umbrella for common ‘skimming’ tactics in payslips

A common tactic that we see from umbrella companies (including the industry giants unfortunately) is ‘skimming’ from payslips.

This is where extra costs are hidden in the payslips -- for example, a sham ‘income protection’ product or fee. Skimming is also possibly happening when the lines simply don’t add up. And yes, the lines not adding up is always, somehow, in the favour of the umbrella company!

The warning sign for skimming is the phrase “Employment costs” -- without breaking it down for you into line-by-line detail. Don’t accept this. Instead, ask for an exact breakdown of Employer’s National Insurance, Apprenticeship Levy and employer pension contributions. Don’t get fobbed off with a generic response like this:

“Employment costs include (but are not limited to) employers’ national insurance, employers’ pension payments, gap pay contributions, any approved business expenses that you incur and any other reasonable employment costs.”

Instead, push for a line-by-line breakdown.

Take action: Ask for a pay illustration to check for lines that don’t reconcile.

4. Keep an eye on your holiday pay

Holiday pay is an area of substantial abuse against umbrella company workers, as a BBC programme exposed in March 2021.

In our experience, too, many umbrella companies profit by keeping holiday pay that is lost to the worker at the end of the holiday year. In this scenario, the umbrella company holds back earnings from the worker in a pot, to cover holidays. When the worker takes a holiday, they get paid from the pot. If, however, at the end of the holiday year, the worker has not used all the holiday pay they have saved in the pot, the umbrella company pockets it.

The law around umbrella contractor holiday pay is admittedly not straightforward. The umbrella company should, according to quite recent case law, give the umbrella company contractor a warning that they have not used all of their holiday entitlement. If the worker still doesn’t take the leave, then the holiday entitlement is lost and the umbrella company can keep what’s in the pot. The law is complicated, and not clear, should an umbrella company not warn the worker. But be on guard here otherwise you could face a significant loss. In fact, if the umbrella pockets just three days of holiday per year, the umbrella keeps a very tidy £1,340 per worker, per year (based on an IT contractor earning £500/day)!

Some rogue umbrellas have contracts or processes in place which prevent holiday pay from being repaid until three months after leaving. The big industry giants are in our experience, no exception unfortunately. Such processes intentionally push the worker beyond the deadline to lodge a claim at a tribunal.

Take action: Before committing, grill your umbrella company on their holiday pay practices. Consider asking for payment in lieu of holiday to safeguard your pay. It may also be worthwhile speaking to other contractors who use the umbrella about their experiences at the company with holiday pay. 

5. Be vigilant about mini umbrellas and tax avoidance schemes

Last year, an investigation by The Guardian found unusual payroll patterns among the ‘test and trace’ workforce, with people on the same teams being paid through multiple small companies (‘mini umbrella companies’) that they had never heard of. The use of tax avoidance schemes, including the use of ‘mini umbrella companies’, are estimated to cost workers and HMRC around £1 billion annually. 

Mini umbrella companies are designed to fraudulently reduce tax. They operate by taking advantage of complex supply chains to hide fraud, exploit the Flat Rate VAT scheme, abuse employment allowances, and unlawfully reduce NI contributions to little or nothing.

Signs of mini-umbrella companies include:

• Unusual company names and multiple companies with similar names
• Unrelated business activity (also listed and visible to you on Companies House’s website), notably to services provided by the workers
• Foreign nationals are their directors, with no previous experience in the UK labour supply
• Movement of workers between different mini-umbrellas
• Short-lived businesses, often dissolved within 18 months.

Take action: Be aware of the red flags indicating a mini-umbrella. When you receive your contract, cross-check the employer name against your umbrella company name and the name on your KID -- a discrepancy here is an alarm bell.

6. Be wary of PSLs (and pushy recruitment agents!)

There are many incentives that are offered or expected between the recruitment company and the umbrella company.

Incentives are a catalyst for rogue practices. You, the worker/contractor, not only ‘pays to get paid’ by being charged the umbrella company’s margin, but you also provide additional income for the agency! If an umbrella company commits to incentives, they often have very little choice but to extract additional profits from workers, beyond their fee/margin.

Preferred Supplier Lists (PSLs) are lists of umbrella companies that the agency mandates workers must engage with. While it is reasonable to consider that PSLs were well-meaning at some point back in time, today we regard them as an aggressive and unfair barrier to competition. The PSL presents a revenue-opportunity for recruitment agencies and denies workers the ability to freely choose their own umbrella -- essentially their own employer.

Take action: Choose your preferred umbrella and challenge the PSL with your end client/agent. Consider using a smaller, independent umbrella who is willing to help you convince the agent to go off PSL.

7. Check their compliance

Ensure your shortlisted umbrella company's baseline compliance is monitored by an appropriate third party, including:

• The Freelancer & Contractor Services Association (FCSA)
• Professional Passport
• The Association of Professional Staffing Companies (APSCo)
• Another reputable party, such as WTT Consulting, which is a specialist in this field.

A word of caution however: accreditation (always by its nature carried out at a past date in time) isn’t of course a guarantee of compliance. It’s not always a sign that self-regulatory standards have been met. Be aware, many ‘accredited’ umbrella companies have been found engaged in unscrupulous practices, such as withholding holiday pay or more recently, paying bogus expenses.

Take action: Check the umbrella company is being audited for compliance, but don’t rely blindly on a stamp of approval, and make sure whoever issued the stamp is worth their salt.

8. Check the umbrella company’s reviews

Take a good look at what other contractors are saying about the umbrella company.

Read umbrella company reviews from existing or past users, the contractors i.e. the umbrella company’s employees, on reputable and independent websites like Offpayroll.org and the ContractorUK Forum. But also check general review platforms, such as TrustPilot, Facebook and Google reviews.

When thumbing the reviews, keep an eye out for common threads that signal unethical practices. One review could be a bad experience; six reviews all saying the same thing -- and over a significant span of time, is less likely to be a one-off to disregard. Still unsure? Head over to LinkedIn and ask other contractors in your network what their experiences have been with the umbrella.  

Take action: Check multiple review sites for common red flags before signing up with the umbrella company.

9. Have a direct conversation with the umbrella

Speak to the umbrella directly and grill them on their processes, PAYE models, holiday pay and any questions that your research has flagged up. If things aren’t adding up and they won’t answer your questions, only proceed with the utmost caution.

Take action: Call the umbrella company and get answers to outstanding questions. 

10. Know your employment rights

If you’re getting paid via an umbrella company or another form of PAYE, you are entitled to a wide range of employment rights and protections. These are granted via the Agency Conduct Regulations and the Agency Worker Regulations.

Keep in mind, we’ve seen many workers forced or unwittingly ‘opted out’ of the agency conduct regulations. These protections prevent umbrella companies from withholding pay (even if they’ve not been paid), prevent them from blocking workers from taking up a permanent role with the end-employer, and prevent the umbrellas from charging the worker for ‘work-finding’ services. Common tactics to get you to opt-out include a pre-ticked opt-out box (which is unlawful) that they hope you’ll miss, and putting the tick box to opt-out right next to the one to agree to the terms!

Take action: Scrutinise your contract and do not agree to opt out of the Conduct Regulations.