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How do you spot a good umbrella company from a bad one?

The introduction of the off-payroll working legislation from April 2020 means that limited company contractors in the private sector may find themselves in unfamiliar territory as their choice to work in this way may be taken away from them. Some end clients are making blanket decisions that all of their contract positions are inside IR35 meaning that contractors who are working in these roles will have to operate either through an umbrella company or via an agencies payroll, if that’s an option.

For those contractors wanting to work through an umbrella company, they’ll find that there are lots to choose from. But with so many umbrella companies on the market, how do you know which one is best to go with? Which ones operate compliantly and which ones could cause you problems further down the line?

Here are a few things to consider when choosing an umbrella:

A good umbrella will…

  • Have a number of accreditations from supervisory industry bodies such as FCSA.
  • Give full transparency with their margin (sometimes referred to as a fee)
  • Be transparent with their calculations, providing you with a complete take home pay illustration with all costs included. When you get paid by the umbrella, they should give you a comprehensive breakdown of your payment calculation.
  • Not make deductions from your wage to cover statutory entitlements (e.g. National Minimum Wage, holiday pay, maternity/paternity pay, sick pay, etc)
  • Provide you with an employment contract with no joining or leaving fees, nor a minimum engagement period.

A bad umbrella will…

  • Have very little in the way of third-party accreditations. Don’t be fooled by statements such as ‘HMRC approved’ as HMRC don’t ‘approve’ any company or organisation in this context.
  • Hide tiered margins (or fees) that increase depending on the size of your payment.
    Not provide you with a full breakdown of your calculations to ensure you aren’t aware of any hidden costs or extra deductions.
  • Make deductions from your earnings to cover statutory entitlements. This means they are not fulfilling their legal obligations and should definitely be avoided.
  • Advertise a rock-bottom margin but then rack up hidden costs. They can charge you for anything and everything, fees for same-day payments, issuing you with a P45, providing a reference, the list goes on!
  • Promise tax relief on travel to work expenses with no tax consequences. If it sounds too good to be true, it usually is. Be wary of suggestions like this because operating through an umbrella company usually means you are acting under supervision, direction and control, meaning its highly unlikely you’ll be able to claim for many, if any expenses.

We’re only touching the tip of the iceberg with these suggestions, there are plenty of others things you should consider when choosing an umbrella company. Do they offer salary sacrifice on personal pension contributions? How many members of staff do they have answering queries vs the number of contractors using their service – will they be able to answer your queries quickly and effectively? Are they listed on your agency’s Preferred Supplier List? If not, why?

Just remember, the umbrella company you choose will be your legal employer, so make it one you’d want to be associated with.

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