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.

Basically a compliant umbrella company should employ you under an contract of employment and would then enter into a business to business contract with the recruitment agency or client. They should then raise an invoice for the hours/days that you worked which would be sent to the agency/client with whom they are contracted. Payment would be made to the umbrella company to the value of that invoice and they would then pay the employer’s national insurance contribution from the amount received and they would also retain their margin. The balance is your salary which would be subject to deductions for income tax and employee’s national insurance. This model is the same for all umbrella companies as they all have to comply with the regulations which surround PAYE.

Myth #6 – Same day processing is same as same day payments

Fact: No!

Once your salary reaches your umbrella company, they will process your payment to your bank account after calculating the HMRC taxes, your claimed expenses and umbrella company fees. They can initiate this payment in 3 ways. They are;

  • BACS Payments

BACS is an electronic system to make payments directly from one bank account to another. They’re mainly used for Direct Debits and direct credits from organizations. The payments take 3 working days to clear, so the money paid into your account on Monday will clear on Wednesday. Most umbrella companies pay salary using this method. 

  • CHAPS Payments

The CHAPS system guarantees same-day payment so long as instructions are received by 2pm on a working day. There’s no limit to the amount of money you can send through CHAPS, although it’s a relatively expensive way to transfer money (banks typically charge as much as £35 for each CHAPS transfer). Some umbrella companies provide this service for an additional fee of £35 or more. 

  • INSTANT/FASTER Payments

Faster Payments are electronic payments that can be made online, over the phone, in branch or through self-service kiosks in fewer than 2 hours – so long as both banks are part of the Faster Payments Service. There’s no charge if you’re a Personal or Premier customer; business customers may be charged depending on their account.

Our umbrella company solution offers instant payments with no additional charges.  

Same day processing is not same as same day payment. It depends on your umbrella company. Some of the umbrella companies say that they do same day payment but what they actually mean is that they initiate the payment on the same day of processing your payslip. the payment may not reach your account on same day. As you can see from above Ganumbra offers a true same day payments and it reaches your account instantly with no additional costs for multiple payments. 

Myth #7 – Same day payment or 3 days payments will not make much difference 

Fact:  It does make a difference…

Although it appears to be only 3 days, you need to know how long time it has already taken since the day 1 of your timesheet approval. There is lot of delay almost up to 1 month.

Let’s break it down for you;

When some umbrella company says we process same day payments, it’s just the heading. You should first know the different steps in the entire payroll process. Let’s say, on 30th Jan you have submitted time sheets to your Agency and the Umbrella company. The timesheet has to get sanctioned from your agency to umbrella company which will take usually 1 to 2 days. Then, your umbrella company raises the invoice for your timesheets and sends to your agency where they will take approx 8 to 10 working days to pay your salary to the umbrella company. Also, what you need to know here is, most of the umbrella companies do payment processing for all their contractors working for different agencies, once a week – let’s say on every Tuesdays. If your company gets your payments from your agency before Tuesday you are safe, if not you will have to wait for them to initiate the payment process next Tuesday only which is clearly 1 week of delay over the top of all the delays.

As you can see, payment processing is something which includes many steps and coordination between your umbrella company and your agency. If there are some mistakes, then it would again take few more days to sort. Hence, it is always recommended to work with umbrella companies which make dedicated multiple Instant payments which reaches and appears on your account the same day within few hours.

Our umbrella company offers premium umbrella service completely free of cost for your first year. When it comes to the payments, we make instant multiple direct debit payments every day! As soon as we receive your salary from your agency, we instantly transfer it to your account. If we get more than 1 payments, we transfer at no extra costs!  Because we understand that there is much time gone already in waiting and we don’t want you to wait furthermore for no good reason.

Myth #8 – Some umbrella company allows me to claim more expenses than others

Fact: No! practically not possible… 

All legally compliant umbrella companies operate under the same Tax rules of the United Kingdom. What expenses you may claim is dependent on your individual circumstances rather than which umbrella company you may choose. Hence it’s a myth that some umbrella companies allow more expenses than the others.

Myth #9 – As per the new HMRC regulations for umbrella companies I am not allowed to claim any expenses through umbrella companies

Fact: No!

As per the HMRC guidelines of April 2016, some of the expenses were shifted from claiming on payroll to reclaim from HMRC at the end of the tax year and some changes are introduced based on Supervision Direction and Control. That means,  you will still be able to claim certain types of expenses on payroll and some others will be paid back from HMRC. 

Read more on HMRC allowed Expenses Claim .

About us: we are an umbrella company called Ganumbra, we offer beyond the standard set of employment benefits like Critical incident support, Legal support counselors, customizable EAP website, Family life solution, Clinical counselling, Financial support counselling, Personal assist manager and many more are provided, which are usually not given by most of the umbrella service providers. Find out more at Ganumbra Employee Benefits.  Our admin charges are lowest in the market , we offer first 3 months free service as welcome offer. Our support team is available between 7 am to 7.30 pm on chat call and email should you need assistance.

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