Since the announcement that IR35 would be implemented in the private sector, there has been an uptick in umbrella companies targeting UK contractors. However, with so many to choose from, how should freelancers choose the best umbrella company for them and what should they be aware of when selecting one to handle their payroll?
Take home projection
It is important to be careful when choosing an umbrella company based on the take home pay projection they provide for you. It is not unheard of for umbrella companies to manipulate this projection so that you are more likely to choose them over other companies.
To get around this, ensure that certain things have been taken into account in your projection. Firstly, is it realistic? It is not uncommon for projections to be based on 52 weeks of work in a year with no time off whatsoever, a highly unrealistic scenario.
Does the projection take the £100,000 abatement into account? Does it include expenses, even though you’re not likely to claim any? Have the umbrella company used an appropriate tax code? Finally, have they been transparent with regards to the margin?
Umbrella company margin
As all compliant umbrella companies will process your pay via PAYE, the only factor that should influence your take home pay is the margin the company charges for their services. Other than this, all other deductions, such as tax and National Insurance, are set by HMRC.
Simple, compliant registration
You will need to provide specific information to your umbrella company when you register in order to ensure you are working for them legally. This includes: your personal information (name, National Insurance Number, name etc.); proof of identity; and your right to work in the UK. These are legal requirements and umbrella companies that don’t ask for them should be avoided.
Compliance and accreditation
Make sure that an umbrella company is accredited by the FCSA (the professional body governing compliance and ethical practice in the supply chain of temporary workers). In order to gain this, companies need to pass a series of thorough assessments and audits.
While it may not be a legal requirement, you’ll want a decent level of customer service from your umbrella company and should avoid engaging with one that doesn’t offer this. Make sure to check out a company’s website and online presence. Things such as online reviews and how easy they are to contact should tell you a lot about the experience of working for them.
When applying, you’ll want to make sure that an umbrella company is up front about things such as pay deductions and costs (e.g. joining or leaving fees) before you register. You don’t want a company that’s going to spring these things on you after you’ve joined.
Perks (but watch out for tax avoidance)
In order to snare more freelancers, many umbrella companies will offer perks to employees. Some of these are perfectly fine, such as insurance cover, same day payment, discount schemes, referral rewards etc.
However, it is important to be alert for companies offering things that could be unethical and land you in trouble with HMRC for tax avoidance. If a company is offering things such as “less tax” or for you to “keep 90 per cent of your pay”, or says they are “IR35 friendly”, they should be avoided.
New umbrella companies are appearing all the time, so, when choosing one, the best advice is to go with a company with proven track record. Established, reliable umbrella companies that have been operating for years are more likely to be compliant and offer a high level of service. Many newer companies are less reliable and some could even land you in tax trouble.