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Are Umbrella companies still relevant?

Temporary workers need to consider their arrangements

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The Low Incomes Tax Reform Group (LITRG) is urging workers to consider their relationship with Umbrella companies carefully, particularly as the key advantage of travel expenses has all but been closed off.

Following the new travel rules, effective from 6th April 2016, that requires a test of Supervision, Direction or Control (SDC), workers are now unlikely to benefit from tax and NIC relief for home to work travel expenses. Furthermore, Umbrellas are no longer able to replace or ‘sacrifice’ some of a workers’ taxable pay with tax and NIC free reimbursed expenses and giving relief as part the workers’ weekly/monthly payroll as they have done in the past. This is because new rules, also implemented from 6th April of this year, require employers to operate PAYE tax and NIC on any expense payments made to employees in connection with ‘relevant salary sacrifice arrangements’. The LITRG warns that even if an Umbrella claims it has designed a process that doesn’t fall within the definition of ‘relevant salary sacrifice arrangements’, this is probably not within the spirit of the law and is likely to be tackled by the Government in due course.

Umbrella companies may advise their workers that they are still eligible for tax relief on expenses that they incur personally and not just those related to home to work travel. However, the expenses rules for employees are very restrictive and whilst there may be a few expenses that an Umbrella can process, these are basically limited to those expenses incurred to enable a person to do their job.

Although Umbrellas cannot offer workers the same tax efficiency as before their place in the labour market is maintained by agencies who are unwilling to deal with taxes and day-to-day staffing issues and who prefer to delegate such matters to Umbrella companies.

With the tax effectiveness of Umbrellas now stifled they now have to emphasise other selling points that make them more attractive than agency PAYE, e.g ‘employee’ rather than ‘agency worker’ employment rights that includes redundancy and unfair dismissal rights, a childcare voucher scheme or shopping discounts.

Umbrellas do provide a continuous payroll link which helps prevent short-term overpayments of PAYE tax.

An Umbrella company’s ‘advantages’ can only really be gauged against the level of the fee charged by it to its worker. If, having decided that an Umbrella is not for them, a worker prefers to be dealt with under standard agency PAYE arrangements, then they need to make this clear to all parties. By law, agencies are primarily responsible for paying the temporary workers they supply, so any reluctance on their part to process pay themselves should be met with a reminder of their obligations.

All the above advice and information is contained in a recent guide for workers, titled, ‘Umbrella companies brave the storm – but should you be using one?’ which can be found here. This has been published out of concern for agency workers who may be confused by the various marketing claims and thereby help them to make an informed choice.

Anthony Thomas, Chairman of the LITRG, said:

“If you are thinking of paying a fee to an Umbrella company, it is important to understand what you are getting for your money – you should not just accept things you are told about still being able to claim for expenses other than those related to home to work travel for example, without trying to understand for yourself how worthwhile this really is to you.

The general expenses rules, which apply equally to those under agency PAYE as to those working for an Umbrella company, are very tightly drawn, meaning there may be few expenses for the Umbrella company to process. In addition, even if you do have some expenses that qualify for tax relief, the Umbrella company should probably not be giving you tax relief there and then as part of your weekly/monthly payroll. Instead you will need to claim tax relief at the end of the year ……

It may be that your circumstances mean that you are still attracted to umbrella PAYE over agency PAYE and this is fine. Our message is simply to weigh up all the issues before making that decision and hopefully our guidance will help you do this.”

By Qdos Contractor


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26 thoughts on “Are Umbrella companies still relevant?”

  1. John Wood

    It’s unbelievable how the right to claim expenses were withdrawn for agency staff some of which have to travel hundreds of miles and stay away from home during the week just to get a decent job and yet expenses are still available for MP’s to stay over in London, some of which is often abused. “We’re all in this together”, my ****.

  2. Linda Cottam

    I am now looking at going Limited as this offers some reprive for expenses and subsistence and can be beneficial for high valued short term contracts.

  3. Ross Baker

    It is disappointing that the technical aspects of the compliant umbrella employment model are poorly explained in this article and the related guidance.
    You do not pay a fee to the umbrella company for it to employee you or any other services.
    The compliant umbrella employer makes money by charging your services to a client at a higher rate than rate at which it pays you. The difference is the umbrella margin. It is exactly the same as the temp model, but with a transparent margin.
    To add my own comments on points covered in the article, the benefits of a compliant umbrella provider are;
    An outsourced service to the recruitment business, benefiting both recruiter and worker. The recruiter benefits from outsourcing the administration and risks of engaging with workers and the worker benefits from 1 employment.
    The cost to the recruitment business of outsourcing the non-core activity, should be the costs of employment (that they would otherwise (incur) + the umbrella company margin. This will leave the worker better off working for the umbrella company.
    The customer focused, operational excellence of the top umbrella providers will get the worker onboarded and paid accurately and on time, first time and every time. Many recruitment agencies cannot achieve this.
    Tax relief is still available for mileage expenses between workplaces, workplace training costs, relocation costs and professional subscriptions.
    Contrary to the article therefore, in a lot of cases, the compliant umbrella employment model should still be chosen over agency PAYE.

  4. Michelle

    I am an agency teacher and I am being told by a teaching agency that I must join an umbrella company what can I do? Is it worth my while? I will have to pay for monthly oyster card can I c
    Laim this back?’ If so how

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