Umbrella Companies for Contractors – How to Compare?

Although it’s imperative to equate different umbrella companies on tangible benefits (such as payment model and fee structure) each offers, it is equally imperative to contemplate the intangible reimbursements that umbrella companies offer a contractor. When a contractor is searching for an umbrella company to work with, there are certain things that he/she should keep to mind. When exploring prospective umbrella companies, a contractor must ensure if there are any penalties or hidden costs attached to the joining or leaving process of an umbrella company. Few points to consider while selecting an umbrella company are:

 Percentage fee structure versus fixed fee structure: Majority of umbrella companies in the United Kingdom either offer a fixed fee structure or percentage based fee structure to a contractor. A contractor must make sure that he/she is conveyed the gross fee of the assignment, and not the net fee. A net fee comprises of taxes and deductions which makes it even more problematic to equate dissimilar umbrella companies and each company might use different deductions while quoting a net fee. The key point here is to evaluate the gross fee instead of the fixed fee.

 Expenses dispensations: On 6-Apr-16, HM Revenue and Customs (HMRC) introduced a regulation where each contractor working under an umbrella company is considered to be under control, direction or observation, unless he/she can verify otherwise. As per the regulation, a contractor is constrained as to what he/she can and cannot claim as expenditures. If a company states that they have ‘certain specific’ expenditure allowance or permit a contractor to avail for numerous outlays without any receipts, be very cautious. During the initial discussion ask the umbrella company about how the reimbursement process works.

 Sick leave and Holiday allowance: Certain umbrella companies might pay a contractor an extra 12.07% to cover the yearly leave while some other umbrella company might take the legal annual leave. During the initial discussions, check with the umbrella company about the leave model they desire to use and how this model will be mirrored in the final payslip. Additionally, with a doctor’s note, an umbrella company is lawfully bound to pay a contractor legal sick pay post four successive days away from work.

 Insurance cover: In case of an insurance cover, an umbrella company is legally liable to provide a contractor with an insurance cover. An umbrella company must provide a contractor with public liability policy, employers’ liability policy, and Professional Indemnity (PI) insurance cover to ensure that a contractors is adequately insured before commencement of an assignment. An insurance cover protects a contractor if he/she become unwell or gets hurt at work. Although, public liability insurance is not imperative, however, if a contractor gets in contact with the overall public during their work, then it is advisable to have this cover. A contract must have an employer’s liability insurance. However, it is recommended to have professional indemnity insurance and public liability depending on a contractor’s nature of work.

 HMRC claims and IR35: Numerous umbrella companies claim to be compliant with IR35, however, this is immaterial as a contractor is taxed as per standard pay-as-you-earn (PAYE) circumstances as a contractor. Additionally, catchphrases such as “HMRC permitted” simply means that HMRC has permitted an umbrella company to have an allowance to make simpler the way expenditures are interpreted. Carefully evaluate the offerings of an umbrella company and choose one wisely and look ahead of any crafty marketing catchwords.

 Additional costs: Cross-check again for any supplementary costs that a contractor might experience with every umbrella company. Additional costs could refer to fee for joining or leaving the company, any supplementary management costs, or if a contractor is charged for getting payment of the same day.

 Mode of payment: Figure out when and how a contractor can receive payment while comparing an umbrella company. Below mentioned are a few checkpoints:

• Once a contract has submitted the timesheet, what is the time it takes to receive the payment in the bank
• What is the payment schedule of an umbrella company – Will the company pay a contractor on a monthly or weekly basis
• Does the umbrella company offer Bankers' Automated Clearing Services (BACS), Clearing House Automated Payment System (CHAPS) or ‘Faster Payments’ transfers options to a contractor
• Does the umbrella company make available same day payment option for a contractor? If it offers same day payment, does the umbrella company charge an extra rate for making payment on the same day?
• Does the umbrella company have any policy to hold back any fund for unforeseen event?
• If a contractor has any issues with payment, how does an umbrella company tackle such applications?

 Pensions: There are numerous tax benefits to paying into auto-enrolment and pension which means an umbrella company must provide a contractor with a pension scheme. Also, contributions towards pension must be made under an umbrella company’s group pension scheme. It must be noted, that a contractor cannot pay into a private pension scheme to obtain tax benefits. Hence, a contractor must check if an umbrella company offers a group pension scheme or not.

 Access to online portals: Since a contractor needs to fill timesheets on regular timesheets, he/she must check with an umbrella company about their online portal where a contractor can add contract related billing information easily. If a contractor does not have access to an online portal, he/she will be required to use other methods such as fax, or e-mail to send a paper-based timesheets. Certain umbrella companies provide additional features as part of the online presence, such as an online expense management and help desk.

 Customer reputation and service: Certain umbrella companies provide an assured degree of customer service and this is imperative as a contractor wants to feel safe and content with an umbrella provider. A contractor may also be required to research a little more about an umbrella company before finalising a contract. For example, number of years an umbrella company has been in business? Number of contractors that work for the company? A contractor can also use glassdoor.com to see what other employees have to say about the company. Additionally, seek recommendations and check the company’s customer service record.

Advantage of working with an Umbrella company:

 All the paperwork will be performed by someone else

 All National Insurance contributions (NICs) and taxes are subtracted before a contractor gets the payment, hence he/she does not have to be bothered about further payment of taxes

 Helps a contractor to understand if contracting is good for them

 It is very easy to use for a contractor – he/she just needs to file in their timesheet and payment details and based to the invoice a contractor will be paid

 Working as an Umbrella company is most appropriate for short-range agreements and agreements with value less than £25,000 per year

Disadvantages of working with an Umbrella company:

 A contractor is dependent on an Umbrella Company to accumulate the money from the client and then make the payment to a contractor

 A contractor will receive the payment which is subject to pay-as-you-earn (PAYE) tax and National Insurance (NI) contribution whether a contractor is under the purview of IR35 or not

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.