If you’re new to umbrella companies, there is a lot of information to take on board. However, you’ve come to the right place, because the umbrellacompanies.org.uk website is full of useful umbrella company advice! Keep reading, and we’ll summarise ten key pieces of umbrella company advice for contractors, freelancers and temporary workers.
1) Compliant umbrella companies will process your payroll in the same way
Umbrella companies process their employees’ payroll with Pay As You Earn (PAYE) – HMRC’s tax system. To put it simply, if you use an umbrella company, you’ll be taxed very similarly to an employee in a full-time position. However, those who use umbrella companies will also be subjected to employment costs (the Employer’s National Insurance Contributions and the Apprenticeship Levy). These will be deducted from the assignment rate you negotiate with your recruitment agency or end-client. Therefore, make sure you take these extra deductions into account when choosing whether to take an assignment with an umbrella company.
2) The only income umbrella companies generate for themselves is the umbrella company margin
There are a lot of misconceptions that umbrella companies retain a lot of income for themselves. This isn’t true. Compliant umbrella companies generate a margin for themselves – and this is it. The rest of the deductions are sent to HMRC.
3) Make sure you’re given accurate, realistic umbrella company take home pay calculations
Every compliant umbrella company will process your payroll in the same way. The only difference between providers will be the umbrella company margin. Therefore, you should expect to retain very similar take home pay from provider to provider. If one umbrella is offering you a considerably higher pay retention that another – something dodgy may be going on. Sadly, some umbrella companies are deliberately inflating their take home pay calculations to try and trick contractors into using their service over the rest of the marketplace. Don’t be fooled!
Did you know you can request an accurate, compliant umbrella company take home pay from a top 10 umbrella company? Please click here for more information.
4) Familiarise yourself with SDC
If you use an umbrella company, it’s very unlikely you’ll be able to claim tax relief on expenses. This is because of legislation introduced in 2016 called Supervision, Direction and Control (SDC). If HMRC believes you’re subjected to SDC when conducting your assignment, you’re not entitled to tax relief on expenses because, in their eyes – you’re working just like a permanent employee. They don’t have the same ability to claim expenses. Effectively, SDC was introduced to level the playing field between permanent workers and umbrella company employees.
5) Understand the drawbacks of using an umbrella company
Umbrella companies have their advantages, but let’s focus on the negatives first. Because umbrella companies operate PAYE, you will not retain as much of your income compared to contracting through a personal service company while outside IR35. Therefore, umbrella’s are not the most efficient way for contractors to be paid. However, if you’re inside IR35 – they’re a good option.
Umbrella company employees also:
- Are responsible for employment costs (from the assignment rate)
- Have a lack of control over their finances compared to operating through a PSC
- Are dependent on the umbrella company’s service. If the umbrella company is not efficient, payments could be late.
- Must conduct thorough research into the umbrella they choose because engaging with a tax avoidance scheme (even by mistake) has serious consequences.
- Are not likely to be able to claim expenses.
For more information on the disadvantages of umbrella companies, please read our blog: What are the disadvantages of using an umbrella company.
6) Identify the main benefits of using an umbrella company
Umbrella companies have their advantages too! Here is a short overview of the main reasons contractors are happy to use an umbrella company for their payroll.
- PAYE means you pay the correct amount of tax and NIC. You’ll be operating compliantly.
- They’re great for first-time contractors due to the minimal administrative responsibilities.
- No long term commitment. You can join and leave as you please, without any tie-in period or additional fees.
- Access to statutory employee rights.
- Continuity of employment – helpful when seeking external finance, such as a mortgage.
- No need to worry about IR35 status.
- Free insurance cover is included.
For more information on the advantages of using umbrella companies, please read our blog: What are the benefits of using an umbrella company?
7) Never be tempted to use a tax avoidance scheme
Tax avoidance schemes are evil, and you could face severe penalties down the line from HMRC if you engage with one – even by mistake. If you’re used to contracting outside IR35 through a PSC, we understand it may be frustrating to suddenly be inside IR35 and required to use an umbrella – as your pay retention will decline. However, tax avoidance schemes may seem like a great way to boost your income, but they could also land you in serious trouble with HMRC. The 2019 Loan Charge is HMRC’s way of retrospectively punishing those who have engaged with a tax avoidance or disguised remuneration scheme. They could come knocking years down the line – do you want to run that risk?
8) Only consider using an FCSA or Professional Passport accredited umbrella company
To ensure you choose a compliant umbrella company and remain in HMRC’s good books, we recommend you use an FCSA or Professional Passport accredited umbrella. Both of these bodies are dedicated to ensuring the supply chain of temporary workers is compliant and ethical. Accredited umbrella companies will have undergone a thorough audit and will have proved they’re compliant. Only the compliant umbrella companies that are dedicated to following UK tax law and protecting their employees will get the accreditations.
9) Read the umbrellacompanies.org.uk umbrella company guide
To help contractors, freelancers and agency workers understand umbrella companies, we’ve put together The Complete Umbrella Company Guide. This 46 page guide covers everything you need to know about umbrella companies, and it’s available to download now for free. The guide is full of further umbrella company advice that we’re sure you’ll find extremely useful.
10) Visit out top 10 umbrella companies
To help make your life easier, we’ve collated a top 10 umbrella companies list for you! Every umbrella in our top 10 is accredited by either the FCSA or Professional Passport, and some have special offers on at the moment. Please check them out now!
