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5 Red Flags to Watch Out for When Choosing an Umbrella Company

Normally when looking for an umbrella company, the golden rule is – if it looks too good to be true, then it probably is.

Below is a list of potential red flags to watch out for which may indicate a non-compliant umbrella company, and how to avoid the potential pitfalls that can lead to this.

Does the Company Look Legitimate?

One of the first things you should ask yourself when choosing an umbrella company is ‘Does this company look legitimate?’, as this can be one of the biggest identifiers as to whether the company is fully compliant or not.

For example; Does the company have a well-built website? Are they easy to contact? Does the company have a Social Media Presence? Has the umbrella company got a simple user-friendly employee portal to easily access thing like payslips?

Aside from this, make sure you do your research; a simple google search is often a good starting point when trying to find out whether an umbrella company is legitimate, as former employees will have often taken to the internet to have their say on the company if there was evidence of any wrong doing.

Another thing to bear in mind when looking for a compliant umbrella is that some umbrella company directors sit on the board of the FSCA, therefore making it a biased adjudicator.

Inflated Take-Home Pay

If you choose an umbrella company based entirely on what they advertise as their take-home pay, it is likely to only cause issues. If an umbrella company claims you are eligible to receive more than 80% of your wage, this should almost definitely be viewed as a red flag, as the company in question is more than likely twisting the rules in their favour to avoid having to pay tax. This underhand tactic used by umbrella companies to achieve a bloated take-home pay figure involves splitting the pay into two sections; one half being a taxable salary and the second half being a loan, which they claim is non-taxable.

To avoid a situation like this, it is best to understand what deductions you should be paying prior to things like pension contributions, student loan repayments and holiday pay.

Another deduction that is worth being aware of is your umbrella company’s marginal fee – it’s best to make sure you know exactly how much this is from the offset to avoid complications somewhere down the line.

Remember, a compliant umbrella would typically offer you a take-home of 60-65%. If you have worked for an umbrella company in the last 6 years then it is likely that at some point, unlawful deductions have been made against you. If you think this may be the case, visit to find out how you can reclaim £1000s.

Paying You Through Various Alternate Means

If an umbrella company decides to pay you through a loan, credit or investment payment then this a great indicator that the company in question is uncompliant. Umbrellas that try to pay you through these means are doing so because these methods are not subject to income tax. Although the umbrella may suggest that doing this is completely legitimate, rest assured it is not. The HMRC have declared that these actions are nothing more than tax avoidance.

‘IR35 Compliant’

Be aware of an umbrella company that advertises themselves as being ‘IR35 compliant’, as they will only be using this phrase to drive business. In reality, there is no such thing as ‘IR35 compliant’ in relation to umbrellas, as payments are processed via PAYE. It’s down to the agency to be compliant. After all, it’s the agency’s responsibility to deem if the worker falls into IR35 & needs to go through an umbrella.

Some companies may use the statement ‘IR35 compliant’ to try and sound legitimate, when they may in fact be the exact opposite.

Know What You’re Entitled to

When entering into a contract with an umbrella company, it is important to check if they are offering you all the same benefits and employer rights as a standard permanent worker. These standard offerings should include things such as sick pay and maternity pay.

In addition to this, an umbrella company must also make sure they operate a holiday pay policy – without it, you as the contractor are not necessarily a ‘genuine employee’, and therefore may be classed as ‘self-employed’.

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