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Phil McDonald

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Lowdown on PAYE umbrella companies for HR managers


This article was written by Phil McDonald, Managing Director of PAYE umbrella firm Paraplus.

An umbrella company is a organisation that acts as an employer to contractors who work under a fixed term contract. With a pay as you earn (PAYE) umbrella company, contractors become an employee of that umbrella organisation. It issues invoices to the recruitment agency or client and, when payment of the invoice is made, will typically pay the contractor through PAYE with the added benefit of offsetting some of the income through claiming expenses such as travel, meals, and accommodation.

It’s not an unknown fact that UK businesses these days are relying more on a new flexible contract workforce. As budgets remain tight unnecessary spending is no longer an option, and with the growing contract labour market, the organisations supplying contract workforces are increasingly using payroll umbrella companies, or their own travel and subsistence schemes to drive down costs. 

This should create the ultimate win/win – however with many good things, there is often a hidden challenge. How umbrella companies operate, and how travel and subsistence schemes are operated, varies – with some not as ethical as others. The crucial thing to know is that the umbrella company that you, or your suppliers, work with is operating transparently, with nothing being hidden from you or your contract workers.

Once you are confident you have a compliant and ethical provider, the benefits are plentiful. Firstly, and most importantly, they can help you minimise any compliance issues or concerns. With contract workers comes a host of legal paperwork, such as meeting HMRC guidelines and complying with employment legislation like Pensions Auto-Enrolment or Agency Worker Regulation. An umbrella company takes this burden away from you and ensures that all legislative and regulatory requirements are met.

Secondly, they can also help with the retention of your contract workforce. A good umbrella company should help contractors maximise their take home pay, and offer them a number of other benefits, such as helplines and insurance cover. A happy, well informed worker is a loyal worker, which is always good news for the HR manager. After all, less churn means a reduction in training and hiring costs.

Lastly, selecting the right umbrella company can also protect reputation. If contractors and temporary workers feel like they’re being ripped off, people will hear about it. You will have seen well publicised incidents in the national media when this has failed to happen. And it wasn’t the umbrella company’s name in the headline; it was business using the contract workforce. It’s in your interest that workers are payrolled fairly and ethically, keeping your reputation intact. When it comes to reputation, the plausible deniability “we didn’t know… we weren’t aware” is no longer a defence.

Once on board, be sure that you work with the provider to establish a strong partnership with you. This will help and expedite the process of informing your organisation’s sites, recruitment agencies, and your temporary/contract workforce of what they’re doing. This partnership approach will also ensure that you are always informed, always aware of everything that’s happening.

A one-size-fits-all approach doesn’t always work here, and working alongside an umbrella company isn’t right for everyone. You need to take a little time to review exactly what you are looking to achieve through using a contract workforce and make sure you know how your current contract workforce is being payrolled. You must fully understand the reasons your contract workforce provider is using their current pay model and, importantly, understand exactly how that pay model operates. If not, you have no guarantees that what you are paying for pay, holiday pay or pensions is reaching the right place – the worker.


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