Top 10 tips for choosing an umbrella company

The long-awaited new version of IR35 was finally introduced last week, but there’s still no let-up in the stream of contractors being asked to use umbrella companies.

With quite a few umbrella businesses on the market, how on earth should contractors choose which umbrella is best for them? The short answer is ‘research and questions,’ with you - the contractor - doing all the digging, writes Lucy Smith, managing director of Clarity Umbrella.

As a minimum, before you hand over your hard-earned cash, ask these 10:

1. Are you a UK incorporated company?

Always do a quick check on Companies House to see if the umbrella company is incorporated in the UK. Their website may indicate it is, but it’s always worth a quick check with register of companies.

Obviously if you start seeing any tax havens appear by the company or its directors, then you may want to tread carefully. If you do register, then always check that the company that you are employed by on that contract is the company that you originally registered with.

2. Can I have a full breakdown of take-home pay?

Always ask for a full pay illustration from the umbrella, giving you a transparent breakdown of deductions from the contract ‘day rate,’ all the way through to you net take-home pay.

If you are looking for a like-for-like comparison between umbrella companies, always be specific about what you are asking for. Some companies will assume a working month of 21 days or include tax-free expenses that you may not be able to claim, both of which will inflate the final take-home pay figure.

Remember, every umbrella company should be offering a very similar take home -- within just a few pounds (and caused only by the differing margin). All taxes and National Insurances should be similar.

Related, don’t forget that the agency you engage through should also be able to provide you with a Key Information Document (KID). This should outline and confirm all deductions from gross to net pay. It should also detail the umbrella company and confirm who will be deemed your employer for the purposes of the assignment. Again, check that this name is who you believe you will be engaging with!

3. Do you apply entry / exit fees?

Although these fees seem to happen less and less nowadays, always check that there are no tie-ins to the brolly; and no entry or exit fees. While you’re at it, check their minimum requirements for your assignment as these may differ between umbrellas, notably minimum terms, minimum rates and notice periods.

4. What does the umbrella’s margin look like?

The ‘margin’ is obviously the bit that the umbrella takes for the employment model and processing your payroll.

Again, be careful contractors. There are still a few brollies out there that charge a percentage of your earnings, so if you are a high earner this can be significant. In my view, such a model seems especially unfair as the work they are doing is the same for every employee on their books.

Margins can differ massively nowadays, but as a word of warning do keep this is mind -- an umbrella company is a costly business to run, both to remain compliant and keep customer service levels high.

Be alert to the fact that there is a possibility that an umbrella charging lower rates has either a large amount of employees on their books (which makes their lower rate feasible), or they are keen to try and compete with larger intermediaries. If the latter, it could inadvertently mean they end up putting themselves out of business in trying in focus too much on becoming a rival.

5. What’s the holiday pay policy?

Consider if you want the umbrella to show you the allocation of holiday pay and, if so, ask how they operate this. Is it accrued, or rolled up and deemed to be repaid every time they make payment to you?

Then, it is also worth you making a check on the contract of employment before you sign on the dotted line, just to make sure that any accrued holiday pay is always repaid if it is not used by the end of the holiday year.

6. Is anyone you trust recommending them?

Contractor recommendations are going to be more important than ever with the currently changing industry! Many contractors will take to social media to ask for recommendations, and it is always better to get it straight from an actual brolly user/customer, that a brolly is worth its salt. Ideally, try to get two or three recommendations independent of each other if you really want peace of mind.

7. Can you put me through to your customer services team?

Personally, I always advise anyone to speak with an umbrella company before engaging with them. It is one of the easiest ways to get a feel for the way that the umbrella will look after you and how knowledgeable they are.

Ultimately, they are dealing with your money, so you need to know that you will be looked after by a company that is switched on, polite, efficient, responsive, pro-active and ‘in the know.’

8. How much of a pension?

It seems the pension is becoming more and more important in the eyes of those contractors who, until now, worked via their own limited company, but who are now being moved to umbrella working in light of IR35 reform.

Some umbrella companies will only offer the standard Auto Enrolment for your assignment, but others are able to process via ‘salary sacrifice,’ giving you both tax and NI savings on any pension contribution you make. So, check their offering and make sure that it works for you and what you want from a pension option.

9. Is that Joe, Mel, Denis or Sheila?

I hear so many contractors frustrated by the fact that they cannot reach the same person at their umbrella! They end up having to go through their questions and queries over and over. So, ask if you will have one point of contact for the assignment and, if you will, know that it will make your life much easier.

10. Strange terms that should spook

If you see any references to the following then strongly consider steering clear of your supposedly bonafide PAYE umbrella company, or urgently query them if you’ve already joined:

  • ‘minimum wage’ payments with a ‘loan arrangement,’ or
  • ‘dividend profits,’ or
  • ‘Employment Benefit Trusts’, or
  • ‘QC Approved,’ or ‘DOTAS number’; or
  • HMRC Approved’ (in fact, HMRC don’t approve anyone)
  • 'Umbrella Broker'

One for luck – ‘the PSL issue’

Just for good measure, here’s an additional consideration contractors should make.

Sometimes, you may be asked to work with your recruitment agency’s Preferred Supplier List. I am repeatedly asked if this is actually legal. My answer is there are two ways to look at it.

One  -- that the agency is free to decide who they wish to do business with, and as the umbrella / agency relationship is one of a Business-to-Business arrangement, then ‘yes’ they can.

However, two, on the flip side, you are then effectively being forced into employment with a umbrella company that you may not wish to be employed by!

The better situation is to be told that you can use ‘any provider’ from their PSL, at least allows you some flexibility of choice – although I’m aware, that can still be frustrating if the brollies aren’t to your liking.

Final thought

As you can see, choosing an umbrella company will require a bit of research on your part! I go back to what I mentioned at the start -- you are handing your money over to this business, so always make sure you know exactly what they are going to be doing with it.

Tuesday 13th Apr 2021
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Written by Lucy Smith

Lucy has over 9 years extensive experience in the umbrella market, much of this time spent managing one of the most reputable umbrella companies in the market and now, Clarity Umbrella.
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