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  • Writer's pictureUmbrella Search

5 myths about working with an umbrella company

If you're considering working with an umbrella company, then it's likely that you'll have some preconceptions already in mind.

With plenty of myths flying around about umbrella companies, it can be difficult to know what you can really expect when signing up to work through an umbrella provider.

Thankfully, Umbrella Search are here to bust the myths for you. In this handy guide, we take a look at the most common myths about umbrella companies and whether they're really true, to help every contactor know whether contracting through an umbrella company is the best move for them.

Umbrella employment is not the same as self-employment

It can be confusing to know the difference between being a self-employed contractor, a limited company contractor, a PAYE agency contractor and an umbrella company contractor and many of these terms can become conflated.

However, it's important that contractors understand that working through an umbrella company is in fact different from being self-employed.

Although the contractor has total freedom over which contracts they take on and which clients they choose to work with, when working through an umbrella company the contractor becomes an employee of the provider. This is different from being a self-employed contractor and impacts the way contractors are paid and pay tax.

In the instance that the contractor is self-employed, they themselves are responsible for collecting payment from the client directly, and filing a self-assessment once a year. Only once they've filed their self-assessment will the contractor then pay the tax they owe to HMRC.

However, as an umbrella company is the contractor's employer, they deal with invoicing the client and then paying the contractor a monthly or fortnightly salary. The salary they pay to the contractor is processed through the umbrella company's payroll, ensuring that the right levels of tax and National Insurance are taken from the contactor's pay.

This means that the contractor doesn't need to deal with complex tax returns and can rest assured that their tax affairs are always up to date.

Umbrella company contractors can't claim expenses

This is incorrect, in fact umbrella company contractors are able to claim back certain legitimate expenses which are tax deductible.

Although there is some confusion over umbrella expenses following changes to rules in April 2016, umbrella contractors can claim back certain expenses incurred for things such as training, accommodation, equipment and travel.

This is a win for umbrella contractors, reducing the amount of tax they will owe.

For a more comprehensive guide to umbrella company expenses and what you can claim back read our useful guide.

Umbrella companies don't offer the same benefits as permanent employees

Again, this is completely false. In fact, umbrella company contractors are entitled to the same statutory benefits as any other employee in the UK.

This covers sick pay, holiday leave, maternity or paternity leave as well as pension contributions.

This is more great news for umbrella company contractors meaning they have a level of security if they need to take a step back from the contract.

You can read more about contractor sick pay and other statutory benefits in this handy guide.

Umbrella company contractors aren't impacted by IR35

Contractors will be glad to know that this is indeed true. After all, infamous IR35 legislation can cause a lot of stress, time, energy and money for contractors that become involved in IR35 investigations.

Due to the fact that the umbrella company employs the contractor, they do not need to worry about IR35, taking a weight off the contractor's shoulder.

What is an umbrella company?

Umbrella companies only want your money

This statement is false. Umbrella companies are subject to the same rules as any other employer in the UK and the tax and National Insurance they deduct are in line with the bands set out by HMRC.

The only difference is that the umbrella company will charge a margin, which your payslip will clearly outline.

The umbrella company charges this margin in exchange for the many services and benefits they provide to the contractor, which they otherwise would go without.

These benefits include:

  • Invoicing the client on the contractor's behalf

  • Putting the contractor on their payroll and ensuring their tax and National Insurance contributions are up to date

  • Providing the contractor with the correct levels of insurance needed

  • Covering the contractor with statutory benefits

  • Offering additional benefits such as health insurance, same-day payments and the ability to buy extra holiday leave

You can find out more about the realities of working through an umbrella company here.

Ready to make the move to umbrella?z

Now you know what you can really expect from working with an umbrella company, you may be thinking of making the next move to finding the perfect provider. Thankfully we can help.

Get in touch today and we will work closely with you to get to know what you're looking for in an umbrella company. Our team of experts will carry out the research and due diligence to provide you with a list of the best-suited umbrella companies out there. Ready to give it a go for yourself?

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