Umbrella companies: Dos and don’ts to stay compliant in 2022

Earlier this year, Kingsbridge conducted our IR35: One Year On survey. The results revealed that a surprising 12% of contractors are currently operating through an umbrella company. This could be because they have been forced into that situation by their client or recruiter who does not want to deal with IR35, or they have chosen to use an umbrella company as they feel it is their most convenient option.

Whatever the reason behind the decision, though, it’s important to understand the dos and don’ts of operating through umbrella companies to ensure you remain compliant. To help you out, we’ll take you through what an umbrella company is, why you might use one, and what you need to bear in mind when choosing one.

What is an umbrella company?

An umbrella company, is an organisation that directly employs self-employed contractors and freelancers. They act as a third party between the end client and contractor, managing timesheets, invoicing the client, calculating PAYE tax, National Insurance contributions (NICs) and other deductions, and paying the contractor.

As a contractor using an umbrella company, you will usually pay a fee which will be deducted from your pay. You will also be able to join an auto-enrolment pension scheme and will be entitled to statutory benefits such as sick pay, maternity or paternity pay, and holiday pay.

Why might a contractor use an umbrella company?

As mentioned above, there could be many reasons why you, as a self-employed person, may operate under an umbrella company. For starters, if your Status Determination Statement (SDS) puts you inside IR35, your client may force you to sign up to an umbrella company so they do not have to be responsible for calculating and paying your tax and NICs. Some clients may even have a policy to only engage contractors who use umbrella companies so that they don’t have to so much as think about IR35.

Alternatively, as a contractor, you may simply feel it’s the most convenient option for you because you don’t have to worry about IR35 or even complete a Self-Assessment every year. You may enjoy the statutory benefits of being an employee of an umbrella company, or you may want the long-term “employment” it provides to help with a future mortgage application.

However, in our survey, 62% of contractors said that they weren’t happy to work through an umbrella company. For those that did work under an umbrella, the majority – 82% –  said that the umbrella company was transparent with payments and deductions and this tallies with what we already know: that, for the most part, umbrella companies are a legitimate business.

That does, however, leave almost 1 in 5 contractors working through umbrella companies that they felt weren’t clear enough with payments, and there has been criticism that umbrella companies aren’t adequately regulated. So what can you do to ensure you can tell the good umbrella companies from the ones that could leave you in trouble further down the line?

Don’t go in blind

Before signing up to an umbrella company, do your research on them. Are they legitimate? Do they comply with HMRC? Do they treat the contractors on their books well? You can find out most of this information from reviews, so look for verified reviews from services such as Feefo and Trustpilot.

You should also look for the use of offshore arrangements or loans as these can indicate tax avoidance schemes that will inevitably land you in hot water with HMRC.

Be sure to ask for clarity

If you can’t make head nor tail of the payment terms an umbrella company is offering, do ask them for clarity. If they are a legitimate business then they should be happy to oblige. If they are not happy to elaborate, or if their answers fail to make anything any clearer then this should raise some red flags about their practices. You should certainly not sign up to anything unless you fully understand the terms.

Don’t believe everything you hear

There are some unscrupulous umbrella companies out there offering incredibly low margins and minimal tax deductions. However, these are often rife with hidden charges such as fees for faster payments, fees for issuing your P60 or P45, and even deductions to cover statutory entitlements – a sure sign that they are not fulfilling their legal obligations.

Some will claim to be HMRC approved which is another indicator of something not quite right since HMRC do not approve organisations in this way.

In short, if it looks too good to be true, it probably is.

Seek professional advice

Before signing up to any contractor umbrella company, speak to your accountant or financial advisor to get their take. They will have good advice as well as strong professional instincts about the company you are considering. You could also ask them for recommendations, if they have any.

Your accountant will no doubt also advise you to check your insurance. If it’s up for renewal, or if you need to take out a new policy, Kingsbridge’s contractor insurance package contains all of the business insurances you need, including Public Liability, Professional Indemnity and Employers’ Liability. Find out more and get a quote on our site.