As more contractors and freelancers are working under umbrella companies due to IR35 tax changes, Crawford Temple from Professional Passport outlines some of the things to look out for before going into an umbrella arrangement.
A recent survey conducted by ContractorCalculator amongst contractors on umbrella working highlighted that 57% say they regularly have tax avoidance schemes promoted to them, only 54% understand the difference between rolled up and accrued holiday pay with 19% saying they’ve had problems with holiday pay and only 62% know how to work out whether they have been paid holiday pay correctly or not. Regarding pay, only 49% understand the difference between “assignment rate” and “PAYE rate”; and only 40% can work out from the payslip if they have been paid correctly.
The stats show that clearly, some contractors are finding it difficult to navigate umbrella working, but since the introduction of IR35 tax legislation in April 2021 many more contractors who previously operated through their own limited company are now working through an umbrella company model.
Umbrella companies can be confusing and there is a lot of negative publicity and misinformation that gives them a bad name. However, there are many compliant umbrella firms out there in the market and Crawford Temple, CEO and founder of Professional Passport, the largest independent assessor of payment intermediary compliance, outlines what an umbrella company is, how the umbrella model works and what workers should look out for so they can avoid any problems.
An umbrella company is a company that employs contractors to carry out temporary assignments as their own employees with continuous contracts of employment. Workers are paid PAYE income in the same way as every other employee.
ADVICE: There is no single definition of an umbrella company and the sector is currently unregulated. Most umbrellas are compliant with employment and tax law, but some are not so workers need to be on their guard.
Historically, if you worked through an agency, that agency would usually have paid you themselves. With the introduction of Off-Payroll Working, many organisations have since insisted that workers deemed to be ‘inside IR35’ move to either PAYE through the recruitment company or operate through an umbrella company.
Many recruitment companies do not operate their own Pay As You Earn (PAYE) arrangements for their contracting workforce and in these cases, they will rely on umbrella companies. When an agency passes you over to any umbrella company, they should ensure they also provide sufficient funds to cover all the employment costs that the umbrella company will now have to bear, including the amount to cover the umbrella company charge.
Because the umbrella firm becomes your employer, they will deal with your pay and other employer obligations instead of the agency. This includes paying your wages with tax and National Insurance (NIC) deducted as required by the PAYE system. It is important to note that the rate offered by the agency, when using an umbrella company is the umbrella company’s income and not what you are paid. It is this increased rate that covers the employment costs for the umbrella.
ADVICE: Talk to your agency if you feel strongly that you do not want to engage with an umbrella company. However, be aware that not all agencies run PAYE schemes themselves anymore. Be aware that some agencies receive incentives to encourage you to sign up with a particular umbrella company. Do your homework and think carefully before joining up to any umbrella. Many agencies have an approved and/or preferred supplier list of umbrella firms they would recommend. But check them out for yourself.
Contractual terms offered by umbrella companies do vary and we would always advise that you read and understand the key terms.
As a contractor, you will be an employee of the umbrella company so you will have the same employment rights as any other employee would have. These include the right to be paid the minimum wage, the right to paid holiday, the right to be auto-enrolled into a pension, qualifying criteria, as well as statutory benefits, such as sick pay and maternity/paternity pay.
Your pay will be operated through PAYE with all tax and National Insurance deductions made at the point of pay, just like all other employees.
Working through an umbrella company for a series of assignments also gives you continuity of employment which can help if you are seeking a mortgage or loan. The continuity in pay from one assignment to another also prevents problems like ‘emergency’ tax when you start a new role. Sometimes umbrella firms provide perks but be aware that sometimes they come at a cost.
ADVICE: Be alert to the perks that some umbrella companies advertise to entice you. Some of these may be worth very little or not be relevant to you so weigh up your priorities before choosing an umbrella.
This is an area where many contractors new to umbrella companies become confused. The rate paid to the umbrella company is not the rate you get paid. If you are paid by an agency directly, then the rate they offer you (commonly known as the PAYE rate) is the amount, before your tax and NIC, that you should receive. But this PAYE rate is not the true cost to the agency of paying you. In addition, they have to pay employers’ NIC, holiday pay, apprenticeship levy and contributions into a workplace pension. As such, the real cost to them of taking you on may be significantly more.
When the agency contracts with an umbrella company, and you are employed by the umbrella company, they should pass the umbrella company the full costs of your employment –that is, the PAYE rate plus all the associated employment costs (from the funds they themselves have received from the end client). They will often uplift the rate to also cover the margin cost of the umbrella company. This is commonly known as the limited company rate, or uplifted rate. Where the rate has been uplifted correctly, your take-home pay from the umbrella company should be no less than you would receive had you been on agency PAYE.
If you have a PAYE rate and an uplifted rate provided by your recruitment company many responsible umbrella providers will produce a pay comparison for you.
It is also worth noting at this point that all umbrella companies must operate within the same tax rules and therefore there should be very little difference between the take-home pay you are offered. Should you be offered significantly more take home from a provider beware as this could result in HMRC coming after you later for unpaid taxes. If that were to happen you would end up with less overall than if you had paid the correct taxes in the first place.
ADVICE: Ask your agency for both their PAYE rate and limited company rate when considering a potential assignment.
Generally, umbrella companies will provide 28 days holiday as part of the employment contractual terms. This is one of the costs that is covered in the uplifted rate provided to the umbrella company. This equates to 12.07% of your gross taxable pay and should include both salary and any bonus element of your pay.
Umbrella companies will retain this money to pay you when you are on holiday or not working, although most contractors prefer to have this paid to them immediately. If that is the case, you will be asked to confirm your request in writing before this process is applied. You must remember that were you to request advanced holiday pay this will mean that you have no funds held back for times when you are on holiday or out of work. You can change it back at a point in the future should you wish.
Should you decide to have the umbrella retain the holiday and pay it out on request, you must make sure that you understand the ‘holiday year’ that the umbrella operates. All companies, not just umbrella companies, have a ‘holiday year’, for example, January to December, and you must take any holiday entitlement during that year or it is lost. So, you must ensure you request all your entitlement before the end of the holiday year.
ADVICE: Check how the umbrella company will deal with your holiday pay. Ask them to confirm the circumstances in which you may lose the holiday pay. Under new legislation, workers should not lose any holiday pay. If you leave an umbrella, ask them to confirm that all outstanding holiday pay will be paid to you with your final payment.
The rules relating to expenses for contractors operating through umbrella companies have seen many changes over recent years and are different to the normal expenses rules with many complexities.
There are two types of expenses that can be claimed:
1. Those that are paid from your normal, or general earnings
2. Those where the agency/end client reimburses you
In the case of those you wish to have reimbursed from your general earnings, and keeping things as simple as possible, these tend to only be mileage allowances to temporary workplaces, i.e., not the normal site you visit. If you have other allowable expenses such as train fares or subsistence, these must now be claimed through your Self-Assessment Tax Return.
Agency-reimbursed expenses, where the money is additional income and not general earnings, typically where you claim specific costs incurred, can cover any category of expense, as long as it is to a temporary workplace and wholly, necessarily and exclusively for business.
Your umbrella is likely to require a detailed expense claim form from you as well over and above the one submitted to the agency. This is simply because the umbrella must demonstrate to HMRC why the expenses are allowable for tax purposes, something the agency/end client doesn’t have to do. If you feel you are likely to have either category of expenses, it is worth discussing this at the outset with your umbrella to ensure they can accommodate these and you are aware of their processes for claiming.
ADVICE: Be wary of any umbrella that says they can still process home-to-work travel expenses.
Umbrella workers will generally work under the Agency Workers Regulations. This means that you should receive the same pay and holiday entitlement as a comparable full-time employee. Your gross taxable pay should be equal to or greater than a comparable employee after you have had the correct holiday entitlement applied.
Where the holiday entitlement is greater than 28 days, the umbrella will adjust the percentage being deducted for your holiday accordingly.
Since the new look Off-Payroll legislation came into effect, a proliferation of schemes has been set up purporting to be “umbrellas” and offering a higher take-home pay. If you are tempted to unwittingly engage with one of these disguised remuneration schemes you could face significant future tax bills once HMRC discovers that.
The message is clear and take-home pay should not be one of the criteria used to select an umbrella company as they should all be within a few pence of each other.
It is worth reiterating HMRC’s official guidance that warns contractors to check the following to find out if you may be engaged in a disguised remuneration scheme:
– The company promises that you can keep 80, 90 or 95% of your income and be tax compliant
– Only a fraction of your salary is paid through payroll and subject to PAYE (indicating that you are only paying tax on some of your income)
– You are paid using a loan, credit of investment payment and the company claims this isn’t subject to income tax of National Insurance Contributions (this is tax avoidance)
– The payment from your umbrella company is routed through various companies before it reaches you.
Some other warning signs of disguised remuneration schemes include:
– Not receiving a payslip or receiving a payslip that shows a different ‘net’ amount to what you received
– Receiving more than one payment into your bank account each pay period
– Information in your Personal Tax Account about your pay and taxes that do not match your pay
ADVICE: Be extra vigilant about being offered or given payment in the form of loans, grants or advances. It is likely to be disguised remuneration and workers will be penalised by HMRC for unpaid taxes. One way to monitor your earnings is by signing up for a Personal Tax Account with HMRC: https://www.gov.uk/personal-tax-account.
With a Personal Tax Account, contractors can check that the earnings that are reported on their payslips are the same as those reported to HMRC, as the information is regularly updated following Real Time Information (RTI) submissions.
*Crawford Temple is CEO and founder of Professional Passport, the UK’s leading assessor of payment intermediary compliance. Established in 2007, today Professional Passport is widely recognised as the benchmark of provider compliance with many in the supply chain now insisting on using Professional Passport accredited providers.