With plenty of reputable umbrella providers out there – as well as some unethical ones, we’ve put together a list of 15 things to look out for when comparing umbrellas.
As the umbrella industry is unregulated, not only do you have to avoid tax avoidance schemes, but also beware of skimming tricks used by seemingly ethical PAYE umbrella companies.
Compare umbrella companies – before you start
- Only use UK-based PAYE umbrella companies.
- Do not be influenced by tax-home pay figures which seem too good to be true.
- Remember that the net take-home pay between reputable umbrella companies should be exactly the same.
- The only difference in take-home pay between umbrella companies should be the margin/fee you pay for the service.
1. How much is the umbrella company margin?
Umbrella companies charge a fixed weekly or monthly fee for you to use their services. Some, however, quote their net fee (after tax). It is only possible to accurately compare umbrellas by looking at the gross (pre-tax) margin they charge.
Expect to pay something around £25 per week for a typical umbrella provider. You may find some good introductory offers – perhaps half price for the first month.
It is unusual to find a provider that charges a percentage of your invoices these days. This is rarely advantageous for the worker.
2. Are there any additional fees?
Will you be charged an entrance or exit fee? Are there additional charges for anything else, such as same-day payments?
3. Tie-in period
Do you have to use the umbrella for a minimum term. Is there a notice period?
4. Faster payments
How quickly will you be paid? Most umbrella companies use the Faster Payments method. Make sure you won’t be charged extra for same-day payments.
5. Introductory offer?
The umbrella market is fiercely competitive – especially since the implementation of the April 2021 Off Payroll rules for private sector contractors. Many of the leading providers offer initial discounted periods.
6. Is the umbrella company compliant?
As we mentioned earlier, umbrella companies are not regulated by an official body, which has enabled some unscrupulous providers to target contract workers.
However, there are several organisations which provide rigorous audits of UK umbrella companies.
The FCSA is an industry-run body which undertakes audits on its members to demonstrate that they comply with UK tax law. Members also sign up to a professional code of conduct. Most of the well-known names in the contracting world are FCSA members.
Professional Passport also provides professional audits to umbrella providers.
As employers, all umbrella companies are legally obliged to auto-enrol workers into a pension scheme, although you are allowed to opt-out.
From April 2019, the minimum total contribution into your workplace pension is 8% of your gross pay. This is split between employee and employers’ contributions. Read more in our guide to umbrella company pensions.
8. Holiday Pay
One of the worst practices we have come across when it comes to ‘profiteering’ by unscrupulous umbrella companies is the practice of withholding holiday pay.
In simple terms, over the course of the tax year, umbrellas put aside some of their workers’ income to use as future holiday pay. A decent umbrella should inform you if you have not used your full entitlement.
If the worker hasn’t used his/her holiday entitlement by the end of the year, some umbrella companies have been accused of trousering the remaining funds.
This practice isn’t helped by a lack of legal clarity about the rules surrounding holiday pay, so contractors need to be vigilant to protect their unused holiday pay.
You should ask for details of the umbrella’s holiday pay policy.
HMRC has massively clamped down on the amount of expenses umbrella contractors can claim, since new ‘SDC’ rules were implemented in April 2016.
In essence, this means that you can only claim for a limited number of possible expenses, such as mileage, training and accommodation.
And, if the way you work means that you’re under the ‘supervision, direction or control’ of your end-client, you’re unlikely to be able to claim for anything. Read more about umbrella company expenses.
If you’re told that you can ‘save tax’ by claiming expenses, be very wary.
10. Disingenuous marketing
Aside from unrealistic take-home pay claims (a sign of a dodgy umbrella), even compliant PAYE umbrella companies sometimes resort to making unrealistic claims in their marketing material.
‘IR35 compliant’ means nothing, as you can’t be caught by IR35 as an umbrella employee. And ‘HMRC approved’ is equally non-sensical, as it implies some kind of special treatment (which doesn’t exist).
All umbrella companies must be covered by an employers’ liabilty insurance, by law. As a minimum. Most leading umbrellas also cover their employees for public liability insurance and professional indemnity, as this is usually a requirement of end-client contracts. Many providers state that they have £20m+ total insurance cover.
12. Ease of Use
These days, you should expect your umbrella company to provide a state-of-the-art online portal for you to manage your assignments, timesheets, expenses and payments. Ask for a demo before signing up.
13. Preferred Supplier Lists (PSLs)
Many contractors join umbrella companies which have been recommended to them by recruitment agents. Recruiters often maintain a list of ‘preferred suppliers’ – and will sometimes insist that applicants only use a PSL umbrella.
Clearly, recruiters are often ‘incentivised’ for introducing contractors to umbrella companies. This means that financial reward may be more important to a recruiter than making objective recommendations.
If you don’t want to use an umbrella recommended to you by a recruitment agent, let them know that you would like to choose an alternative. Unsurprisingly, this may be easier said than done.
Find out more about Preferred Supplier Lists and common issues you may face.
14. How are ‘Employment Costs’ accounted for?
There are a number of employer-related costs umbrella contractors should expect to see on their payslips. These ’employment costs’ include:
- Employers’ National Insurance. Read why you must pay this here.
- Apprenticeship Levy. Find out more about this here.
- Employer’s Pension Contributions (if applicable).
These costs should be listed separately on your payslip, not rolled up into one generic entry, which could disguise extra costs being deducted by the umbrella.
Assuming you have a choice, and aren’t bound by a recruitment agency’s ‘preferred supplier list’, by far the best way to find the best umbrella is via recommendations from trusted colleagues.
Umbrella company review sites can be a bit hit and miss. And well-known review sites famously protect paying clients by creative weighting of their ‘out of 5’ scores. Read our in-depth guide to umbrella reviews for more.
LinkedIn is a good place to start. Contractors are likely to give honest feedback. And, as there’s nowhere to hide on the platform, representatives of out-of-favour umbrellas are unlikely to want to enter the discussion.
Comparing umbrella companies – further reading
Read these useful guides to help you further navigate the world of umbrella companies.