What Is an Umbrella Company? A Guide for UK Contractors and Temporary Workers

If you've ever worked temporarily via an employment agency, you might know the phrase umbrella company. Over the past few years, it's become increasingly standard for contract workers or temporary workers to be employed by an umbrella company, rather than the employment agency that secured the work for them.

This generally operates as follows: a client business requires an employee and contacts a recruitment agency. The agency provides the work to be performed but rather than employing the employee directly, the employee is hired by an umbrella company. The client compensates the agency, the agency takes its fee and compensates the umbrella company, and the umbrella company compensates the employee.

A major reason the model is available is to handle payroll. The umbrella company takes over the responsibility of deducting income tax and National Insurance contributions (NICs) via the Pay As You Earn (PAYE) scheme. Effectively, the employment obligations are transferred from the agency to the umbrella company.

What to watch out for

Ideally, nothing is wrong with this arrangement. Nevertheless, new developments indicate not all umbrella schemes are acting according to the rules. HMRC and the Treasury have been concerned regarding some umbrella schemes failing to pay payroll obligations. Consequently, the government has been considering making recruitment agencies, or the end clients in some situations, liable for unpaid tax and NICs, rather than the umbrella company.

Why has it changed? Because there have been genuine instances where workers were deceived or taken advantage of. A few umbrella agencies have provided special high payments, issued irregular payslips, made payments to third persons, or even been based outside the UK. PAYE may not be properly run in these situations, leaving the worker at risk.

If you're employed through an umbrella company, it's vital to keep yourself informed. You should be given a Key Information Document from the agency prior to starting. This should tell you the umbrella company's name, the minimum assignment rate, what deductions they will take, and the minimum gross pay you can look forward to. You ought to receive proper pay slips and perhaps a reconciliation statement detailing how the gross pay is calculated.

Your Rights as an Umbrella Worker

Even though you work for an umbrella company, you still enjoy exactly the same employment rights. You should be at least paid the national minimum wage or the national living wage, you should be automatically signed up to a pension scheme if you qualify, and you're eligible for paid holiday. These aren't nice-to-haves, — they're your entitlements.

Nonetheless, HMRC has pointed out instances where umbrella companies employ tax avoidance schemes to bring employees into substantial trouble. One instance includes schemes which represent part of the wage as a loan or advance to make it tax-free. If the umbrella company fails to deduct income tax and NICs properly, HMRC will pursue the employee personally for the missing tax, plus interest and fines.

Concluding Thoughts

Working through an umbrella company can be a valid and effective method of working, particularly on a short-term basis. But with heightened government scrutiny and HMRC highlighting concerns, it's imperative that workers are familiar with the ways these arrangements work.

If you think the umbrella company you are working for has a tax avoidance scheme going on, or it’s failing to meet its payroll requirements, it’s best to change to a compliant supplier at the earliest. Being aware and watchful is the best method to defend your rights, — and your bank balance.

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