Umbrella Compliance: A brief guide for Umbrella Workers in Architecture

The Basics

Many contractors work through an umbrella company to minimise their financial and tax administration.

Umbrellas are designed to remove administration and company management associated with a limited company, which is why they can be a popular choice for some contractors.

What is an umbrella?

Umbrella companies are businesses that take on workers as their own employees with continuous contracts of employment. Their sole purpose is to employ people like you (often called ‘umbrella workers’).

With an umbrella company, you become an employee of the company. Each week or month the umbrella will invoice the recruitment business or client based on your timesheet. They then pay you a net salary after deducting National Insurance contributions (NIC) and income tax on all your earnings.

What are my employment rights if I use an umbrella company?

Although you might still be referred to as a contractor you must be an employee of the umbrella company and as such you have the same rights as any other employee. These include the right to be paid the national minimum wage, the right to paid holiday, the right to be auto-enrolled into a pension and statutory benefits such as sick pay and maternity pay (provided the relevant criteria are met). All umbrella workers must have a contract of employment with the umbrella.

Umbrella risks

When working through an umbrella company you will be taxed PAYE rates. If you have experience contracting through your own limited company and treating yourself as outside IR35, then you will notice a reduction in take-home pay.

Some umbrella companies promote arrangements that claim to be a ‘legitimate’ or a ‘tax efficient’ way of keeping more of your income by reducing your tax liability.

These types of arrangements leave you at risk because you are ultimately responsible for paying the correct amount of tax and NIC to HMRC.

These types of arrangements may result in you paying additional tax, interest and perhaps penalties if you are investigated by HMRC.

What to look out for

These arrangements may work in different ways, but the companies that use them claim they will help you keep more of your income and reduce your paperwork. However, they may be at best tax avoidance schemes and at worse tax evasion which is illegal.

Some warning signs to look out for:

  • The umbrella company promises that you can keep 80, 90 or 95% of your wages and be tax compliant (this is unlikely to be true as, in most cases, the basic rate of Income Tax is 20% and NIC are also due on earnings).
  • Only a fraction of your salary is paid through payroll and subject to PAYE (indicating that you are only paying tax on some of your income).
  • You are paid using a loan, credit or investment payment and the company claims this isn’t subject to income tax or NIC.
  • The payment from your umbrella company is routed through various companies before it comes to you.

What liability do I have?

Remember, just like everyone else, you’re expected and legally required to pay the right amount of tax and NIC on your income. If these schemes fail you will be left with a huge tax bill having already paid fees to the scheme facilitator.

Anyone who is involved in these types of arrangements, or has used one in the past, is advised to withdraw from it and settle their tax affairs with HMRC.

HMRC has a list of 10 things a promoter of tax avoidance won’t always tell you available here.

Further information

HMRC has produced guidance on Umbrella companies offering to increase your take home pay (Spotlight 45) which outlines what to do if an umbrella company offers to reduce your tax liability and increase your take-home pay. You can view the spotlight here:

https://www.gov.uk/guidance/umbre lla-companies-offering-to-increase- your-take-home-pay-spotlight-45

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