Is There a List of HMRC Approved Umbrella Companies?

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Umbrella companies are a smart choice for many contractors and freelancers. Their security and ease of use are very appealing, and their secure and hassle-free nature means they are an excellent first step for people new to the freelancing world.

However, most people are understandably hesitant when working with an umbrella company for the first time. Contractors will look for certain accreditations and certifications that give them the trust factor. That’s why so many contractors search for a list of HMRC-approved umbrella companies.

Unfortunately, there is no list. In short, that’s because there’s no such thing as ‘HMRC-approved’. Read on as we explore the world of umbrella companies, why HMRC-approved isn’t a legitimate selling point, and reveal our top tips for finding secure organisations to work with.

What is an umbrella company?

Whether you’re looking for HMRC-approved umbrella companies or just the best deal for you, it’s important to get a good understanding of what exactly they are and what they can offer you as a contractor.

A good umbrella company aims to offer the independence you get as a contractor, alongside the perks and security of full-time employment.

They will serve as an intermediary between a contractor and their client, removing the hassle that comes with being self-employed. Tax and National Insurance especially are a minefield to navigate, so having someone there to assist through headache-inducing finances can be a real asset.

Your umbrella company will also assist in all admin work which will result in you having much more time to prioritise business concerns such as finding clients, delivering results and driving revenue.

What is an HRMC approved umbrella company?

An HMRC approved umbrella company is supposedly one which has been approved by Her Majesty’s Revenue and Customs (HMRC), which is in charge of collecting income tax and National Insurance from businesses and self-employed individuals.

However, the phrase ‘HRMC approved’ is a misleading term in itself, as HMRC doesn’t provide approval per se.

HMRC simply works with the umbrella company as they would with any other employer. The company is responsible for calculating the correct amount of tax and National Insurance due and paying it on your behalf. Unfortunately, this means there’s no simple list of HMRC approved umbrella companies.

How umbrella companies work with HMRC

The closest thing to an HMRC-approved umbrella company is simply one which acts compliantly in terms of tax and other employment factors. Here are two key areas to consider.

Tax and National Insurance

The umbrella company is your employer in your relationship and therefore is liable to pay employment taxes through PAYE. However, there are thresholds to be aware of with regards to Income Tax which will increase incrementally as your earnings increase.

For example, any earnings between £12,500 – £50,000 are taxed at 20% whereas on the other end of the scale anything over £150,000 is taxed at 45%. These are good figures to remember when totalling up the amount of work you take on as it could significantly change what you ultimately receive in your wage packet.

Anything in between those bands is taxed at 40%, while you get the first £11,850 as a tax-free allowance. Keep in mind as well that you will not pay Income Tax on the first £1,000 of income on your earnings from self-employment as this is known as your trading allowance.

It is essential to take note that when paid by an umbrella company, it also means that you will pay National Insurance as both an employer and an employee. Understandably, as an employee of an umbrella company, you will be required to pay Employee’s National Insurance as you normally would when working for a business.

However, since the company is not directly benefiting from the work that you are carrying out and only serving as an intermediary, you will also be paying Employer’s National Insurance.

 

Watch out for non-compliance

Be wary of umbrella companies who use scrupulous tactics to lure in contractors such as advertising a better rate by secretly avoiding paying the right amount of tax.

For example, some umbrella companies will promise a take-home wage that equals 85% of your net pay. While this might sound like a high rate, the reality is that you would be leaving yourself open to substantial fines and claims for tax and interest as the contractor will be the one who will be left out of pocket.

Most of these companies have a clause in their small print to the effect that although the umbrella company will pay expenses without receipts, you will need them if HMRC were to investigate you. So if this were to be the case, you could face a hefty fine when you are unable to show proof of your purchases.

A reputable umbrella company will never encourage you to claim expenses that you haven’t incurred, and most will check all your costs claims to ensure that you stay on the right side of HMRC.

It would help if you also were mindful of companies with a complicated payment scheme involving any artificial arrangements such as loans and investments.

IR35

Another way in which umbrella companies help contractors stay compliant with HMRC is through IR35. Again, this is an area where some umbrella companies may be disingenuous and claim to be ‘IR35 compliant’. However, all umbrella companies are IR35 compliant by nature, so it’s not really a selling point.

IR35 is a piece of government legislation that aims to target individuals who work via their own limited companies and in the eyes of government are ‘disguised employees’ to reduce their tax payments.

Introduced in 2000, IR35 was brought in as a way of countering individuals who would receive payments from clients via an intermediary and split profits to be placed in lower tax bands.

Partnering with an umbrella company allows for individuals to circumnavigate IR35 completely as PAYE will tax all income.

Everything in one place

With HMRC approval, IR35 compliance and all the other ambiguous terms, searching for a reliable umbrella company can be tricky and time-consuming. At Umbrella Supermarket, we aim to make the whole thing a snap.

Our umbrella company comparison site allows you to compare the best companies across the UK, helping thousands of contractors find a company that suits their needs. Give it a try today

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