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Published on 1 December 2023

New government guidance on umbrella companies – top 5 ‘takeaways’ for workers

HMRC have published new guidance aimed at helping agencies that hand workers over to umbrella companies understand their legal responsibilities and keep their supply chain compliant. This good, clear guidance will also help workers better navigate through the world of umbrella working. Here we outline the key points from it.

Coloured Umberella with 5 images beneath: hand holding up 1 finger, 2 fingers, 3 fingers, 4 fingers, 5 fingers.

Historically, if you worked through an agency, the agency would usually have paid you itself. These days, many agencies use umbrella companies to pay their workers. Because the umbrella company becomes your employer, it will deal with your pay and other employer obligations instead of the agency. However, just because an agency hands you over to an umbrella company, it doesn’t mean it can forget about you!

HMRC’s new page of guidance for agencies can be found on GOV.UK. It brings together the most important things that an agency needs to know from a tax and employment law perspective when handing its workers over to an umbrella company.

Although the guidance has been written for agencies, workers should find it helpful too as it shines a light on the different relationships and obligations that exist between agencies and umbrella companies. Understanding what you should look out for will inform you, protect you and ultimately help you to navigate through the world of umbrella company working.

1. Pay rates

What HMRC’s new guidance says for agencies

Agencies should be clear about pay rates when they advertise a job.

This is because when an agency passes a worker to an umbrella company, it must make sure that it hands over the correct amount of money to the umbrella company. This is the amount received from the end client as payment for the work. It includes the gross pay rate advertised to the worker (‘the agency rate’) plus all of the costs of employment the umbrella company will now have (for example holiday pay) and their margin. These things together make the ‘assignment rate’. This money becomes the umbrella company’s income, from which it will then pay you your wage.

What this means for workers

It is important that you are clear on what rate your agency is quoting you to work through an umbrella company – is it the ‘agency rate’ or is it the uplifted ‘assignment rate’? It should be the latter – so that you are not essentially paying your own employment costs.

2. Kickbacks

What HMRC’s new guidance says for agencies

Agencies must pay tax on any incentives or rewards they receive from an umbrella company.

An agency may have a pre-approved ‘preferred supplier list’ of umbrella companies that it refers workers to. However, be aware that some agencies are incentivised by a commission (sometimes called a kickback) into encouraging you to join up to certain umbrella companies. They may be led by this rather than the quality of the umbrella company!

What this means for workers

Do not go with an umbrella company just because it is on your agency’s preferred supplier list – you still need to do your research thoroughly.

3. Choice

What HMRC’s new guidance says for agencies

An agency should explain how umbrella companies work to workers, as well as any other employment arrangement options that might be available to them, so that they can decide if it’s right for them.

This has been included because strictly an agency can’t insist that you work through an umbrella company. However, if this is the only route that they use to pay workers, the agency must be clear about this so that you can make a choice as to whether to proceed.

What this means for workers

If you don’t wish to work through an umbrella company, but that is the only option being offered by the agency, you may wish to try and find work via a different agency with other pay arrangements in place.

4. Key information document (KID)

What HMRC’s new guidance says for agencies

Agencies need to complete and issue KIDs properly and at the right time.

Since 6 April 2020, agencies have been required to provide new agency workers with a document known as ‘a key information document' prior to signing them up. This is intended to help agency workers understand how much they will be paid (once all the fees and deductions in the supply chain have been taken into account) and by whom, for example, an umbrella company. You can find more information on GOV.UK.

The KID was introduced to improve transparency of information for agency workers. Unfortunately, however, KIDs are not being used as intended, with many workers not receiving KIDs or KIDs not being completed properly.

What this means for workers

In reality:

  • all agency workers (including those handed over to an umbrella company) should receive a KID, and not just be signposted to a generic one on a website;
  • the agency should give you the KID, although it will need to work with the umbrella company so that the KID is completed properly;
  • although the KID does not have to include precise numbers for pay rates and deductions etc., the numbers should be realistic. In particular, there should not be ‘example’ information, and round sum numbers that do not really reflect your situation should not be used.

See ‘other information’ below for a link to how to report agencies to the Employment Agencies Standards Inspectorate if they aren’t following their obligations.

5. Payslip audits

What HMRC’s new guidance says for agencies

Agencies are encouraged to check workers’ payslips regularly to ensure workers are getting all the employment rights they are entitled to. They are also encouraged to check for signs of ‘mini umbrella company’ fraud and for workers being paid through disguised remuneration.  

Any good agency should be concerned to make sure that any umbrella companies they work with are meeting their legal obligations and not manipulating their workers’ pay and taxes – not just because it protects workers but because it can protect them too. One way of doing this is to check workers’ payslips.

There are commercial tools in the marketplace available to agencies, that can read and audit umbrella company payslips. They then cross-reference the audit with the assignment rate (that is, the amount paid by the agency to the umbrella company) and the pay and tax information that has been sent to HMRC by the umbrella. The combination of these 3 steps means that they can identify when workers are being paid in a non-compliant way, but also other potential pay and tax abuses by umbrella companies, such as taking off other amounts for themselves, in addition to their margin.

What this means for workers

Whether they use an available tool, or check the numbers manually, the key point is that agencies have a role to play here in stamping out abuses so you should not be afraid to ask if they have checked your payslips!

Other information

In addition to the new page of guidance for agencies, HMRC’s refreshed page of guidance for workers can be found on GOV.UK. This page now contains some important – and very welcome – consumer protection messages about how workers can protect themselves from the actions of fraudulent umbrella companies. See ‘Ways to protect yourself’ towards the end of that GOV.UK page.  

We have lots of information on agency and umbrella working on our website. Our recent news article ‘Finding a good umbrella company’ is also available.

Reporting complaints

If you have a problem with an agency, or you think an agency is being non-compliant, then you can complain to the Employment Agencies Standards Inspectorate (EAS).

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