• Over three in five umbrella company workers (61%) believe that there are no advantages to operating via an umbrella company
• Over two-thirds (69%) reported that their clients have insisted they operate through an umbrella company as a result of IR35 reforms
• Over seven in 10 umbrella company workers (74%) are dissatisfied about working via an umbrella company, with one in two (50%) very dissatisfied

The use of umbrella companies – which act as an intermediary between contractors and clients in the supply chain for payroll purposes – has grown substantially since the reforms to IR35 in the private sector in April 2021. In fact, over two-thirds of umbrella company workers (69%) have stated that their clients insisted they work through an umbrella company since the changes to IR35 last year. Furthermore, almost two-thirds (63%) stated that they had some level of choice but were given a limited range of umbrella companies to choose from whilst, concerningly, five per cent were unable to choose their umbrella company and had to operate through one allocated to them.

However, despite self-employed workers being forced to operate via an umbrella company, over half of umbrella company workers (57%) believe that their role is outside of IR35 and that the supply chain won’t allow them to take the risk of working through their own limited company. 

The disadvantages to working via an umbrella company

Despite the recent growth in the use of umbrella companies, the research found that over seven in 10 umbrella company workers (74%) are dissatisfied about working via an umbrella company, with one in two (50%) very dissatisfied. When asked why they are dissatisfied, eight in 10 (80%) cited the fact that they have to cover the liability for Employer’s National Insurance, and where applicable, the Apprenticeship Levy, through a reduction in their day rate.

Moreover, 79 per cent of umbrella company workers cited the fact that they have to pay umbrella company fees, whilst over seven in 10 (72%) argued that they don't have the same full employment benefits as an employee and a further seven in 10 (70%) reported that they lost their independence and ability to work however they wish.

Introduction

Over a third of freelancers (34%) now operate through an umbrella company in the UK, with freelancers increasingly operating in this way since the introduction of the off-payroll working reforms (IR35) in the private sector in April 2021. [1]

The IR35 reforms shifted the responsibility for determining the employment status of freelancers and contractors to the end-clients for medium and large sized private business clients.

Initially implemented in the public sector in 2017, the changes affect how freelancers and contractors can engage with clients, predominantly affecting individuals operating through limited companies.

We know that as a result of the IR35 reforms, and particularly in the immediate aftermath of the implementation, working through an umbrella company has been a requirement for many contractors to secure certain contracts. [2]

In fact, IPSE’s previous research has revealed that over a third of contractors (35%) have left self-employment since the IR35 reforms and of those who remain, one in three contractors (36%) are now working in engagements that are deemed inside IR35. [3]

This is largely driven by the actions of clients when determining IR35 status, with IPSE research revealing that one in five clients (20%) have implemented blanket assessments and determined that all their contractor engagements are within IR35. [4]

Despite the many reputable umbrella companies in the sector, the unregulated nature of the umbrella company market now means that unscrupulous operators and fraudulent companies continue to pose a threat to freelancers by engaging in tax and employment rights non-compliance, whilst undermining the offers of compliant umbrella companies. [5]

Similarly, we also know that of those now operating through an umbrella company, almost two thirds (63%) had some level of choice but were given a limited range of umbrella companies to choose from whilst, concerningly, five per cent were unable to choose their umbrella company and had to operate through one allocated to them. [6]

This report will assess the impact of increased umbrella company use amongst the self-employed sector by evaluating satisfaction levels with a range of different aspects of umbrella company use, reviewing the onboarding process and the provision of key documents whilst also highlighting some of the areas of concern within the unregulated market.

We also asked umbrella company workers what percentage of their annual income comes from roles performed whilst operating through an umbrella company in order to understand how freelancers are now operating and whether they now operate in numerous ways since the implementation of the IR35 reforms.

On average, respondents had an average of 85 per cent of their annual income coming from roles performed while operating through an umbrella company, with almost half (47%) reporting that 100 per cent of their annual income comes from roles while employed through an umbrella company.

Just eight per cent indicated that roles performed via an umbrella accounted for less than 50 per cent of their annual income.

Percentages do not add up to 100% because respondents were able to select multiple responses.

In order to understand the experience of umbrella company workers when moving to umbrella company work, we asked whether they were able to continue with their existing pension provider and whether the rate paid to the umbrella company was amended from the original rate paid to their limited company.

Two-fifths of umbrella company workers (40%) reported that their umbrella company allowed for them to keep their existing pension provider whereas 30 per cent reported that their umbrella company was unable to keep their existing pension provider.

On whether the rate paid to the umbrella company was amended from the original rate paid to their limited company, 29 per cent of umbrella company workers reported that the rate was not amended and a rate change not discussed whilst 12 per cent stated that it was not amended but it was discussed.

A further 13 per cent reported that their rate was increased but not for specific employment costs and nine per cent reported that it was increased to account for costs such as Employer’s National Insurance contributions.

“I am on my second umbrella company in 4 months. I have no idea when I will be paid… I cannot get them to integrate with existing pensions. Nothing is joined up.”

“Much more difficult to set up pension payments to an existing personal pension than under a limited company.”

“I was even forced to take a mandatory pension scheme when I told them I had my own arrangements which I pay into every month and have done for 5 years as a self employed - but they didn't want to listen - I had to wait until the scheme had started and then had to write and OPT OUT of their scheme - total nonsense.”

“I cannot stand it. I was so proud of working through my own limited business, but this is a huge chore. They've messed up my tax (telling HMRC they expect me to earn 300k this year - which has moved me onto an insane tax band. Whereas I'll actually earn around 60k). I lose so much more in tax.”

We also asked umbrella company workers whether their umbrella company had provided them with a payslip, a contract or terms and a Key Information Document when starting out with their umbrella company.

Overall, 88 per cent of umbrella company workers reported that they were provided with terms or a contract by their current or last umbrella company, with just six per cent reporting they had not and four per cent unsure.

In addition, just over half of umbrella company workers (54%) reported that they were provided with a Key Information Document by their current or last umbrella company, with 24 per cent reporting they had not and 19 per cent unsure.

Similarly, the majority of umbrella company workers (94%) stated that they had been provided with a payslip by their current or last umbrella company, with just three per cent reporting they had not and one per cent unsure.

“Payslips are provided, but are difficult to interpret and check because of holiday, use of low regular pay with fake bonus, bundling of tax. I have no choice but to be paid weekly and this can skew the tax & NI compared with monthly. Also makes a mess of pension payments.”

“The company accidentally paid me somebody else's pay slip in the first month. I was asked to keep the money, and pay it back over time. This was initially disturbing, but worked out okay.”

“Payslips wrong almost every month. They have one job and do not do it very well, costing me money.”

“[…] had a very complicated Employment Contract that I contacted them about to ask to opt out of several ridiculous clauses, but they have never produced an amended version.”

In order to understand levels of satisfaction across a range of different aspects to operating via an umbrella company, we asked umbrella company workers what they considered an advantage to operating in this way.

Just over one in four umbrella company workers (26%) cited reduced administrative and time burden as an advantage to operating via an umbrella company whilst a further eight per cent reported that access to professional liability insurance was also an advantage to operating in this way.

A further six per cent cited the advantage of being enrolled onto a pension scheme and another six per cent cited the ability to have a continuous income stream.

In addition, access to holiday pay and Statutory Sick Pay were only deemed advantages by five per cent of all respondents.

However, 61 per cent of umbrella company workers reported that there were no advantages to working via an umbrella company.

“My experience so far (< 2 months) has been satisfactory. It is nice to be receiving a salary quickly and to have reduced stress managing my limited company. However, this contract could easily be justified as outside IR35, and it is distressing to think that my company may become unviable if this is the future of contracting.”

“My whole consultancy business has been destroyed by blanket banning of contractors outside IR35 and there is no benefit of using an umbrella company.”

“No benefits at all - just huge administration burden (two lots of timesheets to do - one for client and one for umbrella company).”

Percentages do not add up to 100% because respondents were able to select multiple responses.

Percentages do not add up to 100% because respondents were able to select multiple responses.

In order to understand umbrella company workers’ satisfaction with several key aspects of umbrella company provision, we explored a range of elements such as payment timings, pension arrangements, holiday pay, communication, management of business expenses and their handling of Employer’s National Insurance, and where applicable, Apprenticeship Levy deductions.

Payment timings

Currently, due to the lack of regulation within the sector, there is no legal requirement for umbrella companies to pay umbrella company workers within a certain timeframe, with umbrellas only responsible for fulfilling their contractual agreements that have been agreed with the individual umbrella company worker.

When asked about the payment timings of their current umbrella company, the majority of umbrella company workers (60%) reported that they were either somewhat or very satisfied with the payment timings of their umbrella company, with 39 per cent very satisfied.

On the other hand, 24 per cent of umbrella company workers reported that they were either somewhat or very dissatisfied with the payment timings of their umbrella company.

This represents a small increase on our research from August 2021, where almost one in five (18%) reported that they were either somewhat or very dissatisfied [9], and likely linked to recent high-profile umbrella companies experiencing cyber-attacks and as such being unable to pay their contractors. [10]

“... They were also late payers and really did not care about freelancers. They just wanted their money.”

“Numerous late payments and poor communication when trying to address these late payments.”

Pension arrangements

Currently, an umbrella company must contribute at least three per cent to an individual’s pension if they are enrolled on their scheme.

Overall, when asked about their satisfaction with the pension arrangements offered by their umbrella company, 37 per cent of umbrella company workers stated that they were either somewhat or very dissatisfied with the pension arrangements of their umbrella company, with 22 per cent very dissatisfied.

This actually represents a small increase on our research from 2021, where over a quarter (28%) were either somewhat or very dissatisfied with the pension arrangements offered by their umbrella company. [11]

A further 28 per cent reported that they were either somewhat or very satisfied with the pension arrangements of their umbrella company.

“There is no consistency. Some do not let you pay into your own private pension, some do let you take expenses, some charge you for business insurance. It is a disgrace.”

“… However, IR35 no longer makes it financially worthwhile for me to continue to work anymore than 2 days a week with most of my salary being sacrificed to the mandatory […] pension provider.”

“They deduct pension contributions but can take up to 6 weeks after the deduction is made before I see it in my pension.”

Communication

When asked about their satisfaction with the communication of their umbrella company, 38 per cent of umbrella company workers reported that they were either somewhat or very dissatisfied with the communication of their umbrella company, with 21 per cent very dissatisfied.

A further 37 per cent were either somewhat or very satisfied with the communication of their umbrella company.

“I'm constantly chasing payments and have to mess around with so much more admin. It's just awful. The communication is terrible. I'm enrolled in pensions I know nothing about and this week they have been hacked and so we have no access to anything. It's a nightmare.”

“Recent malicious attack on mine and other umbrella companies. The communication has been terrible, I have not been paid on time or paid correctly and I'm not convinced my personal data hasn't been compromised.”

Management of business expenses

Overall, when asked about their satisfaction with the management of business expenses from their umbrella company, two-fifths of umbrella company workers (40%) reported that they were either somewhat or very dissatisfied, with almost one-third (30%) very dissatisfied.

Just seven per cent of respondents reported that they were either somewhat or very satisfied with the management of business expenses from their umbrella company.

“I receive no benefit working through the umbrella. I just have to foot my own work expenses/training etc now.”

“Not being able to claim expenses on a weekly basis means that working away from home is now cost prohibitive which makes the contract workforce less flexible.”

In order to understand how umbrella company workers view the IR35 status of their current arrangement whilst operating via an umbrella, we also asked how they view their current role in terms of whether it should fall inside or outside of IR35 and why they think this is the case.

Over half of respondents (57%) thought that their role is outside of IR35 but the supply chain just doesn’t want any risk so is avoiding limited company workers whereas 13 per cent thought their role is inside of IR35 and could understand why they are engaged through an umbrella company as an employee.

A further nine per cent thought that their role is outside of IR35 but the supply chain doesn’t have the expertise to assess it properly.

In addition, eight per cent thought that their role is inside of IR35 but they would rather be engaged directly by the end-client as an employee.

“It just seems wrong to be forced to work via an umbrella when my contract should be outside IR35 but that was the only choice other than not accepting the assignment.”

“I hate the fact that I am paying employers NI on a role I would be confident is outside of IR35 but due to a blanket ban, I'll never know.”

Thinking about your current engagement through an umbrella company, do you believe the role is inside or outside IR35?

With media reports of fraudulent mini-umbrellas and other tax avoidance schemes from some umbrella companies[12], it was important to ask umbrella company workers whether they have encountered or suspected any tax non-compliance or avoidance from their umbrella company.

Overall, when asked if they were concerned with tax non-compliance from their current umbrella company, over half of respondents (53%) stated that they were either not very concerned or not at all concerned with tax non-compliance from their current umbrella company.

However, 15 per cent of umbrella company workers indicated that they were either fairly or very concerned with tax non-compliance from their umbrella company.

In addition, when asked if they had suspected an umbrella company to be adopting a tax avoidance scheme, the majority of respondents (69%) reported that they had not suspected an umbrella company to be adopting such as a scheme.

However, 14 per cent of umbrella company workers reported that they have suspected an umbrella company to be adopting a tax avoidance scheme.

“It's a minefield. Implementing IR35 has created a whole new industry of con artists and liars. I killed my income when I was forced to be inside. Plus, I suspected a tax avoidance scheme with no recourse to anyone without fear of penalties on myself so quit the role and remained unemployed for months after.”

Since the implementation of IR35 reforms in the private sector, contractors are increasingly moving towards umbrella companies and often not on their own accord. In fact, this report worryingly shows that a significant number of self-employed workers have been forced by their clients to operate through an umbrella company due to fears of falling foul of the rules.

While some will argue that they help solve the issues that hiring organisations have around IR35, the unregulated nature of the market means that contractors are now at risk of unscrupulous practices whilst often foregoing previous independence and with increased concerns around pensions, holiday pay, privacy and payment timings.

Similarly, with the majority of umbrella company workers finding no advantages to working via an umbrella, it is clear that more needs to be done to give tangible benefits to umbrella company workers and correct the unregulated nature of this entrant into the supply chain as a result of the IR35 reforms.

Recommendations

1. Government must expediate its plans to introduce regulation of the umbrella company market with the creation of a Single Enforcement Body. IPSE welcomes the recent Call for Evidence on the umbrella market but urges government to make the establishment of a Single Enforcement Body a priority.

2. As part of its work to regulate the umbrella market, government should ensure that employer liabilities, such as Employer's National Insurance and the Apprenticeship Levy, are genuinely covered by employers and not contractors. This report reveals that 80 per cent of umbrella company workers are covering the liability for Employer's National Insurance themselves, through a reduction in their day rate.

3. Umbrella company providers should introduce transparent calculations and clearer explanations for how holiday pay is calculated and administered. With this report finding that 38 per cent of umbrella company workers did not understand how holiday pay is calculated and administered when operating through an umbrella company, umbrella company providers should improve their communication over how holiday pay works and provide greater clarity over the figures provided on payslips.

4. Government should consider how it can ensure freelancers’ incomes are better protected when working inside IR35. Umbrella company providers should be under the same responsibility as other employer's in ensuring that sensitive information is protected and details of any threat to employees' data and earnings should be efficiently and clearly communicated to those affected.

5. Umbrella companies should ensure that their contractors are paid on time – ideally within a 30-day period, like other employees. Despite being required to work in an employment style relationship, a significant proportion of contractors are not receiving their employment income on time – with 24 per cent of contractors reporting that they are dissatisfied with the payment timings of their umbrella company. Ultimately, if contractors caught by IR35 are to be treated like employees, then they must be paid on time and in a transparent way like other employees.

6. Government should review the effectiveness of the current IR35 dispute resolution rules. It is clear that for most contractors, working through an umbrella is not their preferred choice, with more than two thirds (69%) reporting that their client insisted upon it, whilst 61 per cent said that there were no advantages to working through an umbrella company. When a contractor disagrees with their client’s inside-IR35 determination, they can ask the client to review their decision – but ultimately, they often have little choice but to work through an umbrella or refuse work. In fact, previous IPSE research has revealed that just 17 per cent of contractors that challenged their determination had successfully changed their determination outcome. As part of its promised review into the implementation of the off-payroll rules in the private sector, government should assess the effectiveness of the current dispute resolution system to ensure that freelancers with sufficient reason to disagree with their client’s determination can request an independent resolution.