Is there a list of HMRC approved umbrella companies?

Many contractors opt to work under an umbrella company. Widely considered the easy, most hassle-free way to contract versus operating under a limited company, an umbrella company takes care of the contractor’s invoicing, paperwork and pays them through the PAYE tax system, taking care of their often-tricky tax obligations.

Unlike limited company contractors, who are responsible for working out and paying tax through self-assessment, umbrella contractors need only focus on the contract at hand.

However, with more contractors looking to use the services of umbrella companies for this very reason, more umbrella companies have started to advertise themselves as HMRC approved in order to catch the attention of contractors and win their business.

In reality, however, there is no such thing as an HMRC approved umbrella company.

Although a list of HMRC approved companies doesn’t exist, companies do still need to comply with HMRC rules in order to be legal and legitimate. Therefore, contractors need to ensure that the umbrella company they are working with is HMRC compliant.

In this guide, Umbrella Supermarket explains why there’s no such thing as an HMRC approved umbrella company and looks instead at what an HMRC compliant umbrella company looks like so every contractor can rest assured they are only working with the best.

What is a HMRC approved umbrella company?

As we’ve already touched on, there is no such thing as a HMRC approved umbrella company.

This is because an umbrella company is considered as and treated like any other type of employer by HMRC due to the fact that they employ the contractor and pay them under the PAYE tax system.

For this reason, HMRC has declared that it cannot declare an umbrella company as legitimate or not.

In this case, when an umbrella company advertises itself as HMRC approved, it is a false ploy to catch the contractor’s eye and stand out from the competition. In actual fact, the only real way that an umbrella company can stand out from the rest is through the services and benefits it offers to the contractor.

However, although no umbrella company can be HMRC approved, it is important to look out for companies that are HMRC compliant. Working with an umbrella company that isn’t HMRC compliant will ultimately be harmful for the contractor as it is the individual’s responsibility to ensure they meet their own tax obligations.

While the majority of umbrella companies are HMRC compliant, like with any industry, there are always a bad few that are not. Using the services of these non-compliant umbrella companies who claim to be able to help contractors save on their tax will ultimately leave the contractor with a big tax bill and potential penalties.

How to spot an umbrella company that is not HMRC compliant

Luckily, it’s not very difficult for contractors to spot an umbrella company that is non-compliant. HMRC have put together a guide to help people like contractors recognise these very companies.

So, when looking for an umbrella company to work with, it’s important to look out for the following red flags:

• Umbrella companies that say they will process only part of your salary through payroll: a big indicator that an umbrella company isn’t HMRC complaint is that they will offer to process only part of a contractor’s salary through the payroll and pay the remaining sum directly to the contractor. This means that only a fraction of the contractor’s salary paid through the payroll has been subjected to tax although the full figure should be taxable. Although it is the umbrella company that has processed the contractor’s pay in this way, it is actually the contractor who will be held accountable if they are investigated by HMRC.
• Umbrella companies that claim a contractor can keep 80, 90 or 95% of their wages and still remain tax compliant: HMRC have explicitly said this will not be the case due to the fact that the basic rate of Income Tax stands at 20% and National Insurance is also deducted from earnings. Therefore, contractors should see this as a red flag and not be lured in by false promises.
• Umbrella companies that pay a contractor through a loan, credit or investment payment: some umbrella companies will do this as money put through these payment schemes is not subject to income tax. Some umbrella companies will try to claim that this is legitimate, however HMRC have declared it is not.
• The umbrella company routes payments through several other companies before it is given to you: again, this is another red flag and not a legitimate way of paying the contractor.

Although some umbrella companies will claim that they can use these methods and remain HMRC compliant, this is not the case and contractors should not use their services. After all, it is the contractor that will end up in trouble, facing fines and penalties, and not the illegitimate umbrella company.

The good news is, however, that the majority of umbrella companies are legitimate and HMRC compliant, even if no umbrella is technically HMRC approved.

Now you know what to look out for let us help you find the best umbrella company for you

Now you know what to look out for when it comes to working with a HMRC compliant umbrella company, it’s time to choose the best umbrella company for you.

At Umbrella Supermarket, we work with only reputable umbrella companies, so contractors can rest assured they are working with the best.

With our umbrella calculator, contractors can simply input their details and we will generate a list of the best umbrella companies based on your needs. We even show a breakdown of your payslip under each umbrella company to help you compare the best deals for you. Every umbrella company we work with is HMRC compliant with a great reputation, so every contractor can make the best decision. Why not see what we can do for you today?