Umbrella Companies

For information only 


For many years we have argued against the use of umbrella companies because the sole benefit of using them requires an abuse of the rules relating to travel expenses to and from work 

However, in recent years it has become apparent that the situation is worse than that, because many people are being forced to work through umbrella companies, but are not (quite correctly) claiming any tax relief on travel expenses. This is leaving those people significantly worse off than if they were simply employed on PAYE via their agency.  

This is because these umbrella companies are almost universally quoting a pay rate which includes employer’s national insurance. Many also calculate holiday pay based on minimum wage and almost all charge £25.00 to £30.00 per payment. On a weekly payroll, that fee is £12-1300 per year. 

All of this added together means that unless the temporary employee is unlawfully claiming substantial tax relief on travel to and from their place of work, they will be much worse off going via an umbrella company than just being a regular employee. 

We have looked at actual pay slips form some ‘household name’ umbrella companies and even for us, having run a weekly payroll for nearly 30 years, they are almost incomprehensible. 

Firstly, the day or hourly rate is quoted as including Employers National Insurance (ENI). This is just a con. No salary discussion ever includes this. In this country we settle on gross wages as the unit of negotiation. Everyone knows if they are offered a job at £30,000 per year they will not pocked £2500 per month. They will pay tax and National Insurance (NI) and probably net about £2000 per month. Nevertheless, the job ad and contract of employment will not refer to ‘about £2000 a month net’. It will say £30,000 per annum.  

Equally, the employer doesn’t get away with spending just £30,000. They also need to pay ENI (currently at 13.8%) so approximately, another £4000. But again the job is not advertised with a salary of £34,000 and the ENI and Tax and NI all deducted from the individuals pay – but that is precisely what umbrella companies do. 

If you work for an umbrella company have a look at your payslip. The top line pay rate (your rate) will immediately be subject a deduction for ENI – that’s Employers National Insurance and then you will be taxed on the amount left after that. 

Another trick is calculating holiday pay on the minimum wage only and then treating the rest of the wages as ‘fees’. This means instead of getting paid for 28 days holiday per year at the normal hourly/day rate, those 28 days are only paid at minimum wage (currently £6.19 per hour). Again have a look at the payslip. 

Then there is the fee. What is this for? Paying you your PAYE wages apparently. Many are as much as £25.00 per week. Even if there is an element of travel expenses being (wrongly) claimed, all that is saved is the difference between paying that out of gross income instead of net income – i.e. the tax that would be paid on it normally, so about 25%. So to even break even you need to be spending at least £100.00 a week travelling just to offset the umbrella company’s fee of £25.00 per week. 

It would appear that the point about unlawful claims for travelling expenses is being understood by these umbrella companies. So instead of fiddling the tax man they have turned their attention to fiddling the agency temps who work through them. 

As we have said, the payslips are hard to understand. But try a simply calculation. Your rate (as you understand it to be) multiplied by the hours or days you worked should equal gross pay on which you pay income tax and employee’s National Insurance. If there are any deductions from your rate that makes your gross pay lower than the total of the above calculation then you have some serious questions for your umbrella company. 

in the 2015 Budget, having already consulted once on the issue, the Government have announced that they will introduce legislation that will ban the payment of travel expenses to people employed by a third party but under the supervision or control of another. That means anyone working on an agency or direct contract via an umbrella company. A further consultation is promised. 

This is an expression of our opinion. It is not legal advice and should not be read as such. Anyone who requires more information should talk to an accountant, lawyer or the tax authorities themselves.