What is an umbrella company?

Increasingly, employment agencies and businesses use umbrella company arrangements to pay the workers they supply, instead of paying them direct. Workers rarely get any say in these arrangements which are presented on a take-it-or-leave-it basis.

Umbrella companies are found right across the economy but they are a particular problem in construction and supply teaching.

The way they work is that Tthe umbrella company contracts with the organisation that provides the work, and then 'employs' you, the worker, to do it. The umbrella company effectively ‘slots in’ between you and the employment agency or business, becoming your ‘employer’.

As your 'employer', the umbrella company must deducts PAYE tax,  and both employee and employer national insurance contributions from your pay packetand employee and employer pension auto-enrolment contributions from your pay packet.

The umbrella company typically charges a ‘service’ fee for this, which can be as much as £30 a week. The amount paid by the employment business or agency to the umbrella company must be large enough to cover all these deductions, or else you will lose out financially.  

It is not against the law for an employment business or agency to use an umbrella company to pay workers, but unions have major concerns about serious abuses in this sector.

A key problem is the lack of transparency, including pay slips that are very complex and hard to understand, especially if English is not your first language. Sometimes it is hard even to work out who is responsible for paying your wages, let alone how much you are being paid and for what.

Workers are often encouraged to believe that their take home pay will increase but this is not true, especially following a clampdown from HMRC, changing the rules on claiming tax relief on travel and subsistence expenses. HMRC has produced guidance warning about this.

Another problem with all these arrangements is that the organisation providing the work is not the party legally responsible for key statutory rights such as the National Minimum Wage, holiday pay, redundancy pay, protection from discrimination or the right to seek reasonable adjustments if you have a disability

If you are concerned about working through an umbrella company, your best defence is to join a trade union. For example in the construction sector, construction union UCATT, now part of general union Unite, has been campaigning about abuses connected to the use of umbrella companies for many years.  
Some voluntary organisations also offer useful support.

TaxAid is a charity that helps people on low incomes with their tax affairs. It runs a helpline: 0345 120 3779. 
The Low Income Tax Reform Group has produced a useful Fact Sheet on working through an umbrella company. 

It is worth remembering that even though you work through an umbrella company, you are still entitled to the same equality rights, in terms of pay, holidays and hours, as any other temporary agency worker.

Employers cannot escape their obligations under the Agency Worker Regulations by using an umbrella company set up.

Note: This content is provided as general background information and should not be taken as legal advice or financial advice for your particular situation. Make sure to get individual advice on your case from your union, a source on our free help page or an independent financial advisor before taking any action.

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