What is an HMRC Approved Umbrella Company?

A popular choice for contractors, regardless of experience, is umbrella companies. For newer contractors looking to test things out, they offer a low-risk entry into contracting, while the handling of administration and general ease of use makes umbrella companies a convenient choice for more experienced contractors.

While using an umbrella company can certainly be a good choice, working with one for the first time can appreciably be a bit daunting. As with anything, people will look for a sign of trustworthiness, such as certifications or the stamp of approval from an authority, with many contractors looking for an HMRC-approved list of umbrella companies. There is, however, no such list. Read on to find out what you should look for in an umbrella company.

How do umbrella companies work?

In order to find compliant umbrella companies that offer the best service for your situation, it is a good idea to understand what they are and how they work.

Umbrella companies offer contractors a middle ground between salaried employment and self-employment. For a fee, an umbrella company will employ contractors, handling the administration of running a business on the contractor’s behalf while also offering the benefits and security of salaried employment.

If you choose to work with an umbrella company, they will deal with your administration and paperwork. This includes payroll management, recording keeping, and invoicing, as well as assisting with your taxes and National Insurance contributions. The umbrella company will deduct fees and taxes directly from your earnings before paying you, so you won’t have to worry about setting money to one side for the taxman.

Is there a list of officially approved umbrella companies?

When looking for suitable umbrella companies to work with, it is common for contractors to search for a list of HMRC-approved companies. Sadly, such a list does not exist. The HMRC does not provide any official recognition or approval to umbrella companies, though it does work with them as they would anyone else. Unfortunately, the lack of an official list can make finding effective, upstanding umbrella companies quite tricky. However, there are several key factors to be aware of when looking for legally compliant umbrella companies.

Tax and National Insurance

When working with an umbrella company, you will be considered an employee of the company for legal and tax purposes. This means that the umbrella company will be required to pay employment taxes via PAYE.

There are incremental thresholds that will dictate the level of income tax you will pay. For instance, if you were to earn anything in the region of £12,500-£50,000, your earnings would be subject to a 20% income tax. However, larger incomes of over £150,000 can result in a 45% tax rate. When deciding how much work to take on, you should consider these tax brackets, as exceeding one bracket by even a small amount will result in a higher tax rate on your earnings.

In addition to tax, you will also be required to pay Employee’s National Insurance, as you are the employee of the umbrella company.

Assistance with the rigmarole that is paying taxes and National Insurance is a significant reason why contractors choose to work with an umbrella company. Additionally, umbrella companies can help recover certain expenses incurred during your work, which can result in tax benefits.

Unfortunately, some underhanded umbrella companies will use these advantages to lure in contractors inexperienced in working with umbrella companies. Generally, they will market a too good to be true sounding rate of take-home pay. It is exactly as it sounds, and will likely end up with you paying a premium in unpaid taxes and fines. Even when working with an umbrella company, you are ultimately responsible for your taxes, so you should be especially wary of companies touting massive rates of take-home pay or claiming expenses you haven’t incurred, such as meal allowances you haven’t used during your contract.

Recruitment agency recommendations

Some umbrella companies have agreed to pay recruitment agencies for client recommendations. While it is true that some other sectors practice this without issue, it can lead to conflicts of interest, where agencies refer contractors to umbrella companies not because they offer the best service, but because they pay the agency well. Naturally, this can lead to contractors getting a lower quality service.

Umbrella companies that pay agencies referral fees are not necessarily bad by default, though it can certainly be a red flag. You will have to do your own research to distinguish between umbrellas that are low quality and umbrellas looking to advertise.

Umbrella companies marketing as IR35 compliant

The upcoming reforms to IR35 legislation have made this a hot-button issue. However, it currently does not apply to umbrella company employees. You should be wary of umbrella companies marketing themselves as IR35 compliant, as it is possible they use it as a trick to come across as legitimate and law-abiding, when in reality they are as compliant with IR35 as any other umbrella company. As such, it is a good idea to consider what other methods a company like this is using to look more appealing. For more information about IR35, have a look at Umbrella Options’ breakdown of the legislation and the upcoming changes.