The problem with umbrella company comparison sites

As consumers we have all become accustomed to using comparison websites for all sorts of products and services – including insurance, mortgages and credit cards. 

It’s usually a great way of helping you make an informed decision based on where you’ll get a better deal and the best customer service.

But when it comes to choosing an umbrella company, comparison or broker sites may not be your best option.  

HMRC’s Spotlight 55

HMRC’s “Spotlight 55” tax avoidance bulletin, published back in April 2020, warns:

“Comparison and broker websites marketing umbrella companies are not always what they seem”.

The guidance explains that comparison websites often act as brokers to help people find a suitable umbrella company, by ranking and rating the companies based on fees charged and customer service. So far so good. 

The danger is that the high rankings of some umbrella companies could be down to their claims to give a higher take home pay, when what is really being promoted is a tax avoidance scheme. 

HMRC has been zealous in recent years in challenging tax avoidance arrangements. They stress that if you avoid tax by using a non-compliant umbrella company, however unknowingly, you may be liable for the unpaid tax, NICs, interest and penalties. 

Red flag phrases on comparison websites

HMRC cautions that some comparison websites and third-party brokers may offer both compliant and non-compliant arrangements. Those that fall on the non-compliant side, may call themselves “advanced” or “enhanced” umbrella services and use misleading statements such as:

  • “We ensure you get the highest take home pay”
  •  “Retain 80% of your earnings after tax”
  • “Compliant tax efficient pay”
  • “We only use HMRC compliant umbrella companies”

These claims mean absolutely nothing. HMRC does not approve any umbrella companies.

A better comparison

All legitimate umbrella companies must operate under the rules laid down by HMRC, so when you use a comparison website, you are not necessarily comparing like with like.

A better way, whether you are a contractor or a recruitment agency, is to do your own research and due-diligence on any umbrella companies recommended to you. That’s not as difficult as it sounds. The checklist below is a good place to start.

Is / does the umbrella company:

  • UK owned and registered with no off-shore affiliations
  • VAT-registered
  • Use over-arching employment contracts with its umbrella employees
  • Apply full PAYE tax and NIC (Employees and Employers)
  • Pay at least National Minimum Wage and only reimburses expenses above this
  • Pay statutory payments such as SSP where there is entitlement
  • Pay holiday pay
  • Offer a workplace pension

If you are in any doubt, the safest way is to only use umbrella companies which are accredited members of the Freelancer and Contractors Services Association (FCSA). You can find a list of them here.

For umbrella companies that play by the rules, the only way to differentiate between them  comes down to price – the margin they take, and service – how they treat people.

Further reading

A- Z of choosing an umbrella company

A-Z of choosing an umbrella company – Part 2 

The good umbrella company checklist

This article was originally published on 1st May 2020 and updated on 23rd November 2021.