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February 9th, 2023
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5 questions contractors should ask their umbrella company
And no, of course we don’t mean firms that sell devices to protect you from rain! An umbrella company is an organisation that acts as an employer to contractors who are working on assignments for clients through a recruitment agency. The umbrella company processes your timesheets and payroll on behalf of the agency in return for a fee that you pay (often called the ‘margin’) and allows you to offset any business expenses against your taxable pay. For many contractors, this then means they work more tax efficiently than compared to the standard PAYE they may have been used to in permanent employment.
So if your recruitment agency has recommended that you get paid via an umbrella company and you’ve never heard of this way of getting paid before, here are the things you should consider before signing on the dotted line.
1. Will you really take home more pay?
This is the headline that all umbrella companies shout about and for many contractors, it’s true. But you’ll really only feel a significant benefit if you are earning above a certain amount per hour (around about the £8.50 mark but it varies by company), can legitimately claim a decent amount of expenses and can be bothered to put your claim in each week. If you are contracting somewhere very close to home with a small commute and won’t be out of the house for 10 hours each day, your ability to claim tax relief will be minimal. Also remember to ask what the umbrella company’s margin is as this figure can range from £10 to £27 per timesheet for much the same service.
There are lots of calculators online that can help you work out the benefits according to your specific circumstances. We recommend these ones from Contractor Calculator.
2. Could you be taking home even more pay?
Operating via a limited company is generally a much more tax efficient way to get paid for contractors earning over £15 to £20 per hour. If you are strongly persuaded against this by the umbrella company, check their motives. If they don’t offer a limited company option, you’ll represent a lost sale to them so be suspicious about just how much they’re acting in your best interests. However, if you aren’t planning on contracting for long, have been barred from being a company director or are inside the scope of IR35, working through an umbrella is good advice.
3. Do you plan to go back to permanent employment soonish?
If so, an umbrella company probably is the best way to contract for the short term. And by short term, we mean anything from a month to twelve months. Most umbrella companies don’t charge a fee for joining or leaving, making it a highly flexible option. When you have decided to stop contracting, just inform the company and ask for your P45.
4. Can you submit your paperwork by a method that suits you?
In order to obtain the maximum benefit of an umbrella company, you must submit your timesheets and expenses in good time each week or month. Many contractors feel uncomfortable doing this during the course of the working day whilst at their desk, effectively on their client’s time. So if you’re going to be doing your paperwork in the evening or weekend, can you submit your details online via a secure portal? Does the company have an app if it’s easier for you to use your smartphone? Can expense receipts be scanned and emailed or do you need to post them? These may seem like small considerations but if you find the process unwieldy and can’t face claiming your expenses, it’s your pay packet that will suffer.
5. Are you dealing with a reputable company?
Sadly, some umbrella companies have operated outside the law in the past, using contractors’ money to fund other parts of their business and ultimately defaulting on their tax liabilities to HMRC. When an umbrella company goes bump, it’s the contractors whose pay doesn’t hit their bank account as expected who pay the price. This kind of activity earned the industry a poor reputation that isn’t fair to those companies who operate compliantly. But how do you read between the lines of the slick websites and sales teams to work out who to trust?
Firstly, check for meaningful industry accreditations such as FCSA or APSCo membership. Read forums such as the healthily cynical IT Contractor. Ask your recruitment agency why they recommend the company and make sure it’s not because they receive a kickback. Finally, beware comparison or review websites as these are often covertly run by umbrella companies and rankings can be manipulated.
Umbrella companies are experts in payroll and taxation and offer a tax efficient, flexible way to get paid for hundreds of thousands of contractors in the UK. Their employees are fully insured to be working at a client’s site and don’t have to worry about being caught by IR35 legislation. Just make sure it’s the right choice for you and that you choose a company you can trust with your money.
We’re always keen to hear recommendations from other contractors so please post your umbrella company reviews below.
KDR Recruitment is the home of the best data, technology and analytics jobs. For more career advice follow KDR on LinkedIn.
