Using an umbrella company for the first time: 10 useful tips for contractors

Demand for umbrella companies has risen considerably since the government changed off-payroll working rules into the private sector earlier in the year. Many temporary workers have been faced with the prospect of using an umbrella company for the first time, and naturally, many questions have arisen. This article will provide first-time umbrella company users with helpful information so that you can go ahead and engage with an umbrella company with confidence.

Understand how umbrella companies operate

Initially, umbrella company payroll may sound confusing. However, when you break it down, it’s pretty straightforward. When you register with an umbrella company, you become an employee, and the umbrella is your employer. You will be required to work for your end-client and submit the hours you’ve worked to the umbrella.

The umbrella company will receive your gross funds from your agency or end-client. They will then make the necessary deductions (including income tax and National Insurance Contributions) before paying your net salary. Umbrella companies use HMRC’s tax system Pay As You Earn – and we cover this later in the article.

Many agencies will offer their candidates an uplifted rate if an umbrella company is required for payroll purposes. This is because of the employment costs (Employers National Insurance Contributions and the Apprenticeship Levy).

It’s worth noting that the only income an umbrella company generates for itself is the margin they deduct for processing payroll. This margin is usually a weekly or monthly figure.

Consider looking for a different role that’s outside IR35

If you’re considering using an umbrella company for the first time, there is every chance you’ve previously contracted through a limited company (personal service company – PSC). While the changes to off-payroll working rules (IR35) meant contractors could no longer determine their IR35 status, they didn’t put an end to contracting through a limited company.

The supply chain has slowly adapted to the changes, and more agencies and end-hirers are advertising roles inside and outside IR35. There are still genuine opportunities for contractors to benefit from contracting through a PSC.

Should you decide to accept a role that’s inside IR35, you may identify using an umbrella company as the best way to get paid. There are plenty of benefits of using an umbrella company, including free insurance, Same Day Faster Payments, low margins, employee rights, and more.

Request an accurate take home pay projection

Before committing to the services of an umbrella company, it’s understandable that you’ll want to get a take-home pay calculation – to help you determine what your net salary will be for each time you are paid. Therefore, it’s a great idea to ask a couple of umbrella companies to provide you with an umbrella company pay calculation.

It’s important that you carefully look at the finer details. For example, please note the tax code the umbrella has used, how many working days they’ve taken into account, and whether an expenses allowance has been included. Sadly, we’ve come across a few umbrellas that are offering misleading, inflated pay projections to contractors and freelancers. This is done to trick people into registering with them over other umbrellas in the marketplace. All compliant umbrella companies will process your payment in the same way, and therefore, projections shouldn’t fluctuate between providers. It’s also unlikely you will be entitled to claim any expenses due to the introduction of supervision, direction and control in 2016.

Churchill Knight has written a guide to umbrella company calculations, and we recommend you give it a read. It will help you determine whether an umbrella is trying to mislead you into believing you will be able to retain more of your money or not.

Remind yourself what Pay As You Earn (PAYE) is

Pay As You Earn (PAYE) is HMRC’s tax system to ensure employees pay the correct amount of tax and National Insurance. Every compliant umbrella company in the UK will process your payments in the same way – PAYE. If you’re used to being paid outside IR35, please be aware that your take home pay will be lower than you’re used to being paid outside IR35.

As an umbrella company employee, you’ll be paid via PAYE. This means that your umbrella company will receive your gross funds from your agency or end-client and then make the appropriate deductions (including the umbrella company’s margin). Once they’ve done this, you will be sent your net salary, supported with a payslip.

Holiday Pay

When you negotiate your rate of pay, you need to consider holiday pay. Umbrella companies pay each employee holiday pay, but it is a reallocation of their funds. This means that if you use an umbrella, you’re no better or worse off when it comes to holiday pay, but the 12.07% shown on your payslip is taken from the rate you agreed with your recruitment agency or end-client. Usually, umbrella company employees can choose whether to have holiday pay included with each payment they receive or accrued and paid in a lump sum later.

Margin

Umbrella companies will deduct a margin from your gross pay. This is the only income an umbrella company will retain for itself, and the rest of the deductions to a contractors pay are sent to HMRC.

Pensions

As an umbrella company employee, the umbrella must legally enrol you into a pension scheme after 12 weeks. However, if you do not want to contribute to a pension – this is no problem. You can opt-out once you’re automatically enrolled, and your umbrella company should provide you with the information you need to do this efficiently.

Student loan

If you are currently paying back a student loan, your umbrella company will make these deductions for you.

The government recently released guidance called ‘Working through an umbrella company’, and we recommend you give it a read.

Familarise yourself with umbrella company payslips

Several compliant umbrella companies will be happy to provide contractors and freelancers with example payslips before they register – to show how they’re processed and what to expect. Churchill Knight Umbrella is happy to give you an example umbrella company payslip – if you are interested. Please contact us on 01707 871622 or complete the short form here.

Make sure you only consider using a compliant umbrella company for your payroll

You must use compliant umbrella companies for your payroll. Never be tempted to use a tax avoidance or disguised remuneration scheme – because the consequences could be severe (as we cover in the next section).

With over 500 umbrella companies in the UK, there is undoubtedly a lot of choice. Therefore, to make your decision easier, we highly recommend you only consider using an FCSA accredited umbrella company for your payroll.

The FCSA (The Freelancer & Contractor Services Association) is the UK’s leading professional body dedicated to ensuring the supply chain of temporary workers is compliant with HMRC’s rules and regulations. Any umbrella company that has obtained FCSA accreditation has undergone a series of strict audits and assessments – with no stone left unturned. Providers must be able to prove they operate compliantly and in the best interests of their employees.

When undertaking an audit on an umbrella company, the FCSA has its own Codes of Compliance that accredited members must adhere to. And, once an umbrella achieves the prestigious accreditation, it will be subjected to annual audits to ensure they remain compliant with the Codes of Compliance and are still up to date with UK tax law.

Churchill Knight & Associates Ltd official FCSA directory listing

Churchill Knight Umbrella official FCSA directory listing

Acknowledge the risks of engaging with a non-compliant umbrella company or disguised remuneration scheme

Umbrella companies have been in the news recently – for the wrong reasons. Sadly, a few have been acting unethically and promoting tax avoidance schemes, with a recent example being mini umbrella company fraud (MUC).

While most UK-based umbrella companies are compliant, engaging with some could land you in serious trouble with HMRC. In the example above (MUC), a COVID vaccination centre worker discovered an unknown third party was paying him. After looking into it further, it was clear the third party was an unethical mini umbrella company – an arrangement designed to help recruitment agencies avoid their fair share of tax and NI.

Other cases of non-compliant umbrella companies have seen contractors retain upwards of 90% of their earnings. While this may sound great, it is clear those who have engaged with such schemes have avoided paying the correct tax and NI. HMRC is always stepping up its efforts to catch tax avoiders, and if they can’t identify the criminals behind the schemes (which is usually the case), they will come after the people who have engaged with them. In many cases, contractors have faced life-changing penalties. It’s also worth noting that HMRC doesn’t care whether someone intentionally used a tax avoidance scheme or not. There have been multiple cases where honest workers were pushed down the path of tax avoidance schemes against their knowledge, but HMRC didn’t treat them with any leniency.

Please never be tempted to use an unethical tax avoidance scheme. Stay clear of any arrangement that promises to inflate your pay retention. Be wary when selecting an umbrella company. Please make sure they’re UK based and value compliance. The best way to check an umbrella company is compliant is by choosing a member of the FCSA.

Keep your limited company live – if you have one

Understandably, contractors and freelancers might consider taking a role inside IR35 as a setback. However, as time has passed since changes to off-payroll working rules, more and more agencies and end-hirers are advertising roles outside IR35. There are still plenty of opportunities out there for contractors with a personal service company, so we recommend you keep your limited company open rather than hastily closing it down.

Many contractor accountants offer an inactive service, and some even have in-house umbrella payroll to support their PSC contractors.

Do not hesitate to switch umbrella company if you’re not happy with the service you receive

Life is too short to put up with a substandard service! Umbrella companies may not be expensive (because the only income they retain is the margin), but it’s important you get paid with confidence. If you’re not happy with the service you receive from an umbrella company, there are plenty of others to choose from, and switching umbrellas is easy!

If you’re interested in switching to Churchill Knight Umbrella, please contact us today. We’ll make the switching process hassle-free and once you join our FCSA accredited service, you’ll never look elsewhere again!

Consider salary sacrifice as a way of boosting pension contributions

Several umbrella companies can now cater to workers who want to boost their pension contributions tax-efficiently. By opting to retain less of your earnings, you can contribute more considerable sums to your personal pension pot. By doing this, pension contributions are not susceptible to tax or NI – making salary sacrifice a very tax-efficient way to save for retirement.

Churchill Knight Umbrella can help you with salary sacrifice. If you’re interested in finding out more, please visit our umbrella company salary sacrifice page, or call us on 01707 871622.

Churchill Knight has over 20 years’ experience helping UK-based contractors get paid compliantly

Founded by experts over 20 years ago, Churchill Knight is one of the leading providers of contractor accountancy and umbrella payroll in the UK. We have helped over 25,000 contractors, freelancers and temporary workers with their payroll, and we look forward to helping many more.

Since our first day back in 1998, compliance has always been priority number one. We’re delighted to be an accredited member of the FCSA because we believe there is no better way to showcase our commitment to compliance within our sector.

Churchill Knight & Associates Ltd – Please click here for more information about our industry-leading contractor accountancy packages. Please call 01707 871622 or complete the short form here to schedule a free consultation with an expert.

Churchill Knight Umbrella – Please click here to request a free and tailored umbrella company take-home pay calculation. Alternatively, you can request one over the phone by calling 01707 871622.