In a world where more and more contractors are finding themselves inside IR35, umbrella companies have seen a rapid rise in popularity. Well, maybe popularity isn’t the right word to use. Why? Because we’ve seen so many negative comments and articles about umbrella companies over the recent months. As a result, we wanted to explain a few of the common misconceptions about the industry.
Umbrellas offer a solution
If you work as a contractor and your end-client or agency doesn’t want to process your payroll – who should? There are loads of reasons why companies prefer not to have temporary workers on their payroll, such as the added liability, extensive paperwork and administration, costs, etc. Therefore, outsourcing payroll to umbrella companies has become a familiar and popular practice.
Yes – if you use an umbrella company, you’ll notice that the employment costs (Employers National Insurance Contributions and the Apprenticeship Levy) are deducted from your pay. We appreciate this is not ideal, and may come as an unwanted surprise to first-time umbrella users. However, please be aware that these costs should be taken from the assignment rate – the rate in which you agree with your agency or client (gross). Therefore, an appropriate uplift should be included in the assignment rate to cover the employment costs – so that contractors are not out of pocket. Essentially, just because you see the employment costs on your payslip, it shouldn’t mean you financially lose out.
Umbrella companies are not responsible for the changes to IR35
Everybody knows that the most tax efficient way to operate as a contractor is to operate through a personal service company (PSC) whilst being outside IR35. If the government is making it harder for contractors and freelancers to be outside IR35, it’s not the fault of umbrella companies! Umbrella companies exist to make sure those who are inside IR35 pay the legal amount of tax and National Insurance Contributions (NICs). If you’re able to take an assignment that’s legitimately outside IR35 – go for it!
If you are deemed as inside IR35 – you are considered to be doing a role that is similar, if not almost identical to a permeant employee. Permanent employees receive PAYE, and umbrella companies process PAYE. It may come as an unwelcome shock, but they’re operating compliantly and are making sure you pay the legal amount of tax and NICs.
Umbrella companies are not compulsory
You always have the option to say no to using an umbrella company. Using one may be required for specific roles because of the agency or end-client’s preferences, but the power is always in your hands. We don’t think they’re so bad – providing you’ve been told all the correct information. However, it’s your decision.
There are perks to using umbrella companies
If you use an umbrella company, you become an employee of theirs, and with this, you have access to employee benefits. This should come as a welcomed addition – because it’s a fairly new phenomenon for temporary workers to have access to Statutory Sick Pay, for example. You’ll also get access to free insurance cover, and some umbrellas have dozens of “little extras” that actually make them good value.
Umbrellas are not raking in the cash
The only income that umbrellas generate for themselves is the margin they charge for processing your payroll (roughly £15 – £25 per week). It really is as simple as that. The deductions you see on your payslip are sent to HMRC on your behalf.
Umbrella companies are compliant (well, most of them)
Use a compliant umbrella company – and you have nothing to worry about. You will be paying the correct amount of tax and NICs and you’ll have zero risk of an HMRC investigation in the future. Therefore – make sure you do use a compliant umbrella company.
Non-compliant umbrella companies may result in you underpaying tax. Always makes sure you use an FCSA accredited provider, and you shouldn’t have anything to worry about.
We’re here to help
Umbrella companies are not the bad guys. Our stance is pretty clear – we just want contractors to operate compliantly so that they never have to worry about an HMRC investigation in the future. If your future assignments are deemed outside IR35, you may be able to operate through a personal service company (PSC), and this will be the best way to legally maximise your pay retention. If you have assignments that are inside IR35, we can recommend the services of compliant umbrella companies. They exist to help you pay the correct tax and NICs. But remember, it’s always your decision.