Author Archives: Davana Mallikarjuna

Nine popular myths about Umbrella Companies

Exposing the facts!

It is highly suggested that you should know these nine popular myths of umbrella services. Question yourself, are you really in safe hands? Are you sure that the money comes into your account is 100% legal and you are not blacked out in any way. Always make sure that you keep an eye on latest HMRC updates so that you know exactly how it actually works and what is being done.

Facts umbrella company myths

Myth #1 – I can keep 90% of my pay by choosing a right umbrella company

Fact: No!

A compliant umbrella service provider is aligned with UK employment tax laws and are applied to all workers. As per the law, all contractors are subjected to national minimum wage policy. Compliant umbrella companies employ contractors and operate Pay As You Earn (PAYE) income tax and National insurance contributions. Hence it is not reasonable to believe that any compliant umbrella company would be promising their contractors for 80% – 90% take home.

If two umbrella companies are 100% HMRC compliant, only two things should make a difference to your net pay between them;

  1. Umbrella company fees
  2. How much expenses a contractor claims. 

How come some umbrella companies advertise with 80 – 90% take home?

This is an old trick played by some umbrella companies, to promise you a magical sky scraping take home pay, starting from 80 – 90 percent.Certain allowances or a loan will be paid by your own bit of earnings. Umbrella company writes it off as not recoverable on their books. Mind that, any unused allowance  or unrecoverable loan becomes your personal tax liability to pay. When HMRC comes back for investigation you may have to pay hefty penalty. Though it looks like higher net pay, it’s essentially same as increasing your tax liability. 

Portrait of a young businessman holding a pencil and thinking.

Myth #2 – I won’t get the full benefits as “traditional” employees

Fact: No… 

Most of the umbrella companies offer you holiday pay, sick pay and statutory payments and promote that as Employment benefits. But in reality all these payments comes from your own earnings to umbrella company. The fact is, for the days you are off or sick, you will not get paid anyway from the agency and the Umbrella company being the intermediary company will not pay for holidays from it’s pocket.

Then, from where do you think your holiday pay money comes from? The answer is simple… these payments will come from your earnings to the company !

Myth #3 – I don’t need to keep expenses receipts with an umbrella company

Fact: Depends…

Contractors are highly recommended to preserve their receipts to be safer side. No umbrella company is allowed to pay your claimed expenses without a receipt. In some cases if you can’t get the receipts, umbrella companies have an alternate method to back your claimed expenses and under the guidelines of HMRC new expense policy as per April 2016.

HMRC is placing greater emphasis on tackling tax avoidance and could therefore conduct an audit at any time. Compliant umbrella companies will also carry out random checks to ensure the rules are being adhered to.

Myth #4 – I’ll be subject to IR35 investigations as an umbrella contractor

Fact: No !

As long as you are not getting paid dividends from your umbrella company you don’t fall under IR35. After the introduction of MSC Legislation, most of the umbrella companies do not pay dividends. If your umbrella company is still paying you dividends, beware that’s illegal.

Read more: What is IR35?

Myth  # 5: My Umbrella company pay Employer’s NI

Fact: No!

It will be paid from your own earnings. As you read in the Myth #2, no umbrella company will pay for any of your costs like Employer’s NI from their pocket. Even if they promote that they pay, umbrella company being an intermediary, it is clear that it’s been paid from your earning which is given to Umbrella company from your Agency.

An umbrella company is an employer and, as with any other UK employer, they have a legal obligation to pay Employer’s National Insurance contributions to HMRC.

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