Umbrella companies offer a crucial payroll service for temporary workers, though recent events have raised questions about ethical practices within the sector.
Several high-profile umbrella companies have been embroiled in allegations of a practice known as “salary skimming”.
Salary skimming refers to undisclosed or unclear deductions made by an umbrella company. While some deductions are legitimate, concerns arise where fees are hidden, misleading, or not properly explained to the worker.
This article explains what salary skimming is, how it arises in practice, and what contractors can do to ensure they are being paid correctly.
What is “salary skimming”?
“Salary skimming”, while not a defined legal term, is generally understood as the covert or unclear retention of fees by an umbrella company, resulting in contractors receiving less than expected.
It’s important to distinguish this from legitimate deductions.
Where deductions are clearly explained, contractually agreed, and applied transparently, they may be lawful even if they reduce take-home pay.
Concerns arise where deductions are hidden, misleading, or not properly disclosed to the worker.
Compliant umbrella companies generate income from a pre-agreed margin deducted each time payroll is processed.
This margin should be clearly shown in take-home pay illustrations and on every payslip.
In most cases, this margin should be the only commercial income retained by the umbrella, with all other deductions passed to HMRC or third parties such as pension providers.
However, recent whistle-blower cases have highlighted situations where additional income may have been retained through unclear or undisclosed deductions.
These allegations have contributed to wider concerns about transparency in the sector, alongside earlier issues such as holiday pay practices.
How have umbrella companies profited through salary skimming?
A key distinction in salary skimming allegations is whether deductions are made from the assignment rate (before pay is calculated) or from gross pay itself. UK employment law treats these differently.
In late 2022, an umbrella accredited by the FCSA was accused by Contractor Voice of salary skimming.
It was alleged that the umbrella deducted an additional £2 per payroll run without clearly disclosing this on payslips.
Having audited payslips issued by the umbrella from 2017 onwards, Contractor Voice estimated that more than £4 million may have been retained.
The FCSA initially suspended the provider, later extending the suspension following further review.
After appeal, the FCSA’s Independent Arbitration Panel found the suspension justified but concluded that the deduction did not amount to unlawful salary skimming.
The official decision stated:
[The] IAP were content that the deduction of the £2 charge was not ‘salary skimming’ or, in correct legal terminology, an unlawful deduction of wages. The £2 charge was deducted from the assignment rate and was never deducted from the gross pay.
Further allegations have since emerged, including claims of percentage-based deductions embedded within employment costs.
While not all cases have resulted in legal findings of wrongdoing, they have reinforced concerns around transparency and disclosure.
Is salary skimming illegal?
Whether salary skimming is unlawful depends on how deductions are applied and disclosed.
UK employment law prohibits unlawful deductions from wages, but not all deductions fall into this category.
If a deduction is clearly set out in contractual documentation, applied to the assignment rate, and properly explained, it may be lawful.
Where deductions are concealed, misleading, or taken from gross pay without proper authorisation, they may constitute an unlawful deduction of wages.
This distinction explains why some high-profile cases have not resulted in legal findings, despite attracting scrutiny.
How can contractors avoid salary skimming?
Most UK umbrella companies operate transparently and compliantly. However, recent issues highlight the importance of due diligence.
- Choose an umbrella with recognised accreditation, such as the FCSA or Professional Passport.
- Request a take-home pay calculation and check how the margin is applied.
- Understand how umbrella company margins work and what you are being charged.
- Review payslips carefully. Hidden deductions are often small but cumulative.
- Refer to independent guidance such as umbrella company guidance, and HMRC resources including working through an umbrella company and checking your payslip.
- Use payslip review services if something looks unclear. Both Contractor Voice and the FCSA offer review facilities.
- Work with reputable agencies that maintain a preferred supplier list of compliant providers.
Salary skimming poses risks not only to contractors but also to recruitment agencies.
Agencies placing workers should carry out proper due diligence on umbrella providers and be aware of the legal and reputational risks.
In an article published by the Recruitment & Employment Confederation, Fred Dures of PayePass noted:
Workers are understandably wary about which umbrella company they work through. Agencies are advised to undertake enhanced due diligence on all umbrellas they engage with. Being associated with a non-compliant provider can be commercially damaging.
Any agency referring workers to non-compliant umbrella companies risks reputational damage and potential exposure under the Criminal Finances Act.
The government does not fully regulate the umbrella company market
There have been ongoing calls for stronger regulation of the umbrella sector.
While guidance has been published, direct statutory regulation has not yet been fully implemented, although reforms are expected from 2027.
The FCSA and Professional Passport operate voluntary accreditation schemes requiring audits and compliance checks.
However, recent allegations involving accredited providers have raised questions about how effective voluntary regulation is in practice.
