Many of our clients ask us about umbrella companies and whether they’re compliant. This guide will help you to understand how to easily determine whether or not an umbrella company is legitimate.
What is an umbrella company?
An umbrella company, also known as a PAYE company, allows self-employed contractors to sign up rather launching their own limited company. Once the self-employed individual has joined the umbrella company, they become its employee and the company acts as an intermediary between them and the recruitment agency or end client.
Why do people use umbrella companies?
For the contractor, an umbrella company removes a lot of time-consuming admin, such as accountancy tasks and tax management. The umbrella company also manages the payroll by invoicing for the work carried out and paying the individual through PAYE, deducting the usual costs such as National Insurance contributions, taxes and workplace pension payments in the process.
Aside from making self-employment a much smoother process, umbrella companies also enable contractors to work on a self-employed basis for a short period without the need to set up a limited company. For instance, someone may only want to be self-employed as a stopgap between employed roles, so choosing an umbrella company means they don’t have to go through the lengthy and expensive process of incorporating a limited company only to dissolve it a short while later.
Umbrella company checklist
There are multiple factors that need to be checked when choosing an umbrella company either as a contractor or an employer. This will help you to spot whether an umbrella company is non-compliant in any way.
UK company registration: Is the company based in the UK and does it have a valid UK company registration number? If not, this could be a sign that the umbrella company isn’t compliant and further research is required.
Company incorporation date: A newly formed umbrella company won’t necessarily be non-compliant but the newer it is, the higher the chances of there being compliance issues. Umbrella companies that have been around longer usually have the people, processes and expertise in place to ensure ongoing compliance.
Company directors: Companies House allows you to check a company’s directors for free, which includes their previous and current roles. If the people behind a particular umbrella company have a few dissolved companies to their names, this may be a warning sign.
References to being HMRC compliant: If the umbrella company’s website or other promotional materials mention that the company is HMRC compliant or QC approved, this is an immediate red flag. The reason being that HMRC doesn’t endorse umbrella companies, so claims like these are seriously misleading.
Take-home pay: Due to multiple statutory deductions being required, any umbrella company stating a very high take-home pay such as 80% or over is very likely to be non-compliant.
Payslip information: Obtaining an example payslip is an excellent way to get a greater feel for how an individual umbrella company operates. Key inclusions that you should find on the payslip are Employer’s National Insurance, holiday pay, and tax and NIC deductions made on all income. In addition, the payslip will show whether the company name matches the scheme promoter, which is crucial because otherwise payments are being made through a third party.
Prestige can help
Need additional help regarding umbrella companies or anything else relating to recruitment? For expert guidance, please call your closest branch or get in touch through our contact form.