“Nothing beats your own due diligence on an employer”: Take these steps before you become an umbrella company worker

The Freelance Informer reached out to Matt Fryer, Managing Director at Brookson Group, to discuss crucial questions contractors should pose before becoming umbrella company workers. Fryer also sheds light on why contractors shouldn’t solely trust their recruitment agency with their tax liabilities.

What steps should umbrella workers take right now to protect themselves?

Workers can easily fall into tax liability by ignoring red flags or assuming everything is working as it should. The saying “if it sounds too good to be true, it probably is” applies to payroll arrangements.

By applying vigilance to your sign-up process and ongoing relationship with your umbrella employer, you can stay on the right side of compliance. These three steps will help:

• Get a “take-home pay” illustration before you sign up

All umbrella companies can provide an illustration based on your anticipated earnings while engaged with them.

The illustration should include relevant tax deductions and benefit payments (such as pensions) and should be broadly consistent across umbrella companies, as tax rates don’t change from employer to employer. Your agency should also provide a Key Information Document (KID) which can be reviewed alongside the illustration to ensure they are aligned and give you additional transparency about the umbrella arrangement.

If you receive an illustration with higher-than-usual take-home pay, this should be a warning sign. Your higher take-home pay likely means a lower-than-expected payment elsewhere (such as tax), and you’ll be expected to make up that shortfall later, probably when you least expect it.

• Get a contract in place

It may sound obvious, but umbrella employers are required to issue a contract of employment to all employees, just like any other employer. Make sure you get one at the start of your employment, and when you receive it, read it.

Ensure it’s a contract of employment and not a loan, shareholder, or partnership agreement, as there are likely tax consequences with each different type of agreement.

Make sure the agreement is consistent with what you expected to receive. If you work in construction, ensure CIS deductions are noted and your employment status is properly reflected in the document.

• Check your payslips

All reputable umbrella companies will provide payslips for each payment you receive from them. You can check them against the illustration provided earlier in the engagement process and query any significant differences.

Some differences are expected because illustrations are based on assumptions about how you’ll be working, whereas payslips provide an accurate picture of your employment. You can check for appropriate deductions, such as employer and employee National Insurance contributions, income tax, and pension contributions.

Watch for “loans,” “grants,” or other non-salary payments such as profit shares, as these can often mean tax will be payable later by you. Reputable umbrella employers only pay salary wherever possible, as other payment types may be used as tax avoidance measures. Be cautious with expense payments and check them against receipts you’ve provided to your umbrella employer.

Check your net take-home pay against the amount actually received into your bank account. Any difference between these amounts is a red flag, and you should query the difference with your umbrella provider.

Can workers rely on their agency to do the due diligence on their behalf?

Yes, to an extent. There will be some overlap between the due diligence undertaken by recruiters and employees. However, employees should use the agency’s due diligence to supplement their own rather than replace it.

Both will want to check payslips for tax payments. Recruiters may go further with these checks to ensure payslips match real-time information submissions to HMRC to ensure tax compliance, whereas workers will check against payments into their bank accounts to ensure consistency and tax compliance.

Recruiters will check that appropriate insurances are in place and whether the umbrella company is audited by external assessors (such as the FCSA) on a regular basis. Recruiters will review template documents and may undertake audits themselves to check for compliance with tax and employment law. They’ll have some contractual protections in place for their liabilities, but these are unlikely to help employees. Recruiters will also check public records to understand the businesses they’re dealing with.

The same information is available to employees, usually upon request. However, since most employees don’t think to ask for it, they tacitly rely on the agency’s diligence in this regard.

Should workers take matters into their own hands, given that agencies may have been working with non-compliant umbrellas without proper HMRC checks on tax payments?

Absolutely. Nothing beats your own due diligence on an employer.

Ask your recruiter:

• Which umbrella companies do they work with and why (make sure there’s a panel of at least 2-3 umbrella companies)
• What diligence they undertake on the umbrella companies they use.
• For details of checklists, they use to benchmark umbrella companies on their preferred/assured/approved supplier list

Supplement this information with your own diligence to ensure you choose an umbrella employer that’s right for you.