Umbrella companies play an important role in helping huge numbers of contract workers to retain the flexibility of temporary locum work, but with the benefits of employment. They are a vital and often unsung element of the contracting eco-system, which are commonly misunderstood and worse still tarnished with untruths. Here we tackle some of the most common umbrella company myths in circulation. Unfortunately many of these myths are increasingly being peddled and in some situations used mischievously. A recent wave of new dodgy loan providers have been posing as umbrella operators and using these myths to differentiate themselves.
Myth 1 – Umbrellas are all dodgy
The first of our umbrella company myths is just plain wrong. The problem here stems from a number of unscrupulous loan scheme operations which hold themselves out to be umbrella operations. In reality they are anything but and this unfairly tarnishes the perception of umbrella as an offering. Compliant umbrella operators like Exceed Outsourcing are fully transparent in their dealings and make all proper tax and NI deductions. Contractors and agencies alike need to learn to enforce greater self-compliance to combat this misconception.
Myth 2 – Umbrellas have no advantages
Umbrella Company solutions have plenty of advantages for contractors that go far beyond the actual payroll function. Continuous employment, single tax codes, insurances cover, expenses tax relief & PAYE tax compliance to name but a few. Furthermore contractors gain access to statutory rights & benefits of employment such as maternity, paternity, leave entitlements, sick pay and pension’s contributions. This doesn’t even begin to consider the wide and diverse range of additional bolt on benefits that many umbrella operators provide, to add additional value into their offerings. Exceed Outsourcing provide all contractors with access to Contractor Rewards which provides exclusive discounts at over 800 leading UK retailers.
Myth 3 – Umbrellas deduct extra tax
Many union critics of umbrellas have focused in on the apparent deduction of Employer’s National Insurance from contractors pay. However they are totally misunderstanding the situation. Employer’s National Insurance is factored into the calculation of contractors umbrella assignment rate. This means the rate is uplifted sufficiently higher so this deduction is fully covered. The umbrella company is the employer and therefore is legally bound to pay this NI deduction. Employer deductions are made from the uplifted assignment rate and not from the gross pay. Unfortunately many umbrella operators have not been sufficiently transparent about this process, which has led to the development of this myth. Compliant and reputable umbrella company operators will always make the treatment of taxes crystal clear in their materials.
Myth 4 – Umbrellas are a brand new concept
Another of these umbrella company myths has probably materialised as a consequence of the huge flood of new questionable umbrella operators into the market post recent IR35 changes. Umbrella Companies have actually been around for more than 20 years, with many of the leading operators having existed this long. The needs and nature of the contracting market have evolved significantly over this time period. Therefore it is hardly surprising that umbrellas have evolved too.
Myth 5 – Umbrellas do not provide pensions
Again this is way off the mark. Contractors are employed by umbrella companies meaning they hold the same pension rights as any other employment. All umbrellas must therefore offer a pension scheme and automatically enrol employees into that. This is the same for all UK employers as per the Pensions Act 2008. Any umbrellas not doing this are clearly the type to stay well clear of.
Myth 6 – Umbrellas give me 90% take home pay
Compliant and real umbrella companies will never offer take home pay rates anywhere near this level. Compliant operators will operate PAYE with full tax and NI deductions made. The only different in take home pay between operators should be down to their fee or margin for processing payroll. Any umbrella promising increased take home pay is most likely to be a loan scheme, which are now firmly in the crosshair of HMRC with their loan charge legislation.
Myth 7 – Umbrellas are subject to IR35
A highly topical subject due to the massive IR35 turbulence caused by off payroll legislation changes in recent years. IR35 is designed to deal with disguised employment. However with an umbrella company, contractors are employees of the umbrella. Therefore all such contractors are clearly outside the scope of IR35 altogether which blows the 7th of our umbrella company myths out of the water.
