Umbrella Companies

An Umbrella company acts as an employer for contractors on temporary contracts, typically working through a recruitment agency. It serves as a single employer throughout multiple contracts – contracts are between your clients and the Umbrella company, which pays you as an employee through the PAYE system.

The Difference between an Umbrella and PAY 25

An Umbrella typically charges anything between £15-25 per week to each employee.
PAY 25 is free for employees, we do not charge fees to the worker.

Dangers of Umbrellas

Due to the fact expenses can no longer be claimed, a number of Umbrellas compete to get contractors to sign up by using attractive headlines like - ‘guaranteed 90% take home pay’.

Simply put, this scheme would be tax evasion.

A number of umbrella companies have also used loan schemes to ensure a high net take home for the contractor.

Contractor loan schemes (or, as the Government calls them, disguised remuneration arrangements) take many forms – but the underlying structure is that a freelance or contract worker signs a contract of employment with an employer or EBT (employment benefit trust), usually located outside mainland UK jurisdiction. The employer then pays the contractor in the form of tax-free ‘loans’ – which, although appearing as loans on paper, are never expected to be repaid. In return, the scheme provider takes a percentage of the contractor’s income as an ‘administration fee’.

Since the rise of contractor loan schemes HMRC has taken decisive action against users of such arrangements – retrospective legislation was introduced covering transactions as far back as 1999, levying charges of up to 100% of tax avoided (as calculated by HMRC) on the individuals caught in the net.

We have also seen a number of new schemes that use annuities in a similar way. We would expect HMRC to focus on these in the future.