Tips on Choosing an Umbrella Company

“Best umbrella company” is a term you’re likely familiar with. What you should be asking is “which umbrella company is the best for me?”. Having your specific needs met in a friendly, supportive manner is what separates the good umbrella companies from the best.

There are recommended umbrella companies that have become an authoritative name in the industry over the years. If you’re a person who tends to gravitate towards brand longevity, this might be your main criteria for choosing your best umbrella companies and we do recommend looking for a company with a good brand reputation.

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Top 7 tips for choosing an umbrella company

1. Steer clear of umbrella companies that have entry fees, exit fees or minimum term commitments with penalties for leaving early. This is especially helpful if you have not used umbrella companies before; changing your mind could become a financially costly decision if you are subject to these fees.
2. Avoid companies that link their fees to your daily or hourly rate; these can be expensive as your fees increase in line with rate increases. Umbrella companies like this often have complex fee structures that are in some way linked to contract value.
3. Compliant umbrella companies will never tell you it’s acceptable to claim expenses without valid receipts or proof of purchase. In the event of an investigation by HMRC, the expense claim would be disallowed, and you would be liable for all the tax owing on these expense claims.
4. Look for an established umbrella company – this may seem obvious, but several umbrella companies have sprung up recently and if they fold or go into administration, you will be left out of pocket with no recourse.
5. It is often difficult to tell an ethical or honest umbrella company just from their website or a brief telephone conversation. Generally speaking, if they are promising expense claims with ‘no receipts’ and larger than what seems reasonable (or possible) take-home pay, they are best avoided. All umbrella companies operate under the same HMRC regulations.
6. Are they compliant? Have they been reviewed or audited externally? This is becoming increasingly common. Of course, an umbrella company will advise you they are compliant, they are hardly likely to tell you otherwise. Ask what their marketing claims are based on and remember it is you who HMRC will investigate – not your umbrella company.
7. Finally, the personal touch. Yes, fully automated and online-only umbrella companies are cheaper, but you will most definitely need to speak to a human being at some point especially if you are new to contracting. Do a test call and ask a few questions – will you have a dedicated account manager? Do they have service level agreements? Or will you be pushed from pillar to post speaking to 20 different people having to explain who and what you want 20 different times?

FAQs

What is an umbrella company?

A compliant umbrella company will employ the contractor, while the contractor performs assignments for the end hirer. The main function of an umbrella company is to facilitate payment to the contractor, after deducting PAYE tax and National Insurance contributions.

What does an umbrella company do?

Working in conjunction with recruitment agencies, end hirers and workers, a compliant umbrella company will deduct PAYE tax and National Insurance contributions at source, before paying the net wage to the worker. Wages will be based off timesheets the worker submits to the umbrella company. As the employer, the umbrella company also provides payslips.

Should I use an umbrella company if I’m inside IR35?

There is nothing in the legislation which prevents you from operating through your limited company if your contract is inside IR35. The most pertinent benefit of working under an umbrella while inside IR35 is the ease of administration. Once caught by the legislation, workers forfeit the tax planning opportunities of being outside IR35, as well as the benefits associated with employee-status. Using an umbrella company translates into a simplified process for the worker while remaining compliant.

What are umbrella company expenses?

Certain expenses cannot be claimed when working under an umbrella, such as travel and subsistence. Mileage claims can be submitted on the condition your assignment is not subject to Supervision, Direction or Control (SDC). You may also be able to claim for equipment and training expenses incurred wholly and exclusively for business use.

How do I switch from an umbrella company to a limited company?

All you are required to do is inform your umbrella company of your intended move and once they have paid you any money owing to you, they will issue a P45. You can then go on to conduct work through your limited company.

Even the best umbrella company may not be your best option

Even if you choose the best umbrella company in the UK with outstanding service, support and fees, operating under an umbrella may still not be to your best interests. If you are outside IR35, operating through a limited company will always be the most tax-efficient option, increasing your take-home pay when compared to working under an umbrella company.

Working inside IR35, the choice is still entirely yours as to whether you want to operate under an umbrella or go limited. The clear advantage of working under an umbrella is that as you become an employee of the umbrella company, and IR35 is no longer a factor you need to consider or be affected by. This could be enough of a deciding factor for many contractors who want to avoid IR35 intricacies altogether.