5 big fat myths about umbrella company working
Believe it or not, the majority of umbrella companies want to do their best for contractors, not take advantage of them. Together with our fellow FCSA members, and the FCSA itself, we have often had to be vocal in our defence of the legitimate umbrella industry in the face of negative press. These inflammatory articles perpetuate the myths about umbrella working in the UK.
Here we aim to clear up the biggest of these misunderstandings. We want to get across that “proper” umbrella companies are contractor champions rather than pantomime villains guilty of pillaging the temporary workforce.
Myth #1“I can keep 90% of my take home pay”
Who wouldn’t be tempted by such an offer? Alas, this is the biggest myth of all. A compliant umbrella company employs its workers and operates PAYE and NI contributions, as well as adhering to National Minimum wage and processing holiday pay.
The only difference in take home pay between legitimate umbrella companies should be the margin they retain.
Any “umbrella” provider promising up to 90% take home pay is highly likely to be a tax avoidance scheme in the guise of an umbrella company. The most prevalent arrangements include contractor loan schemes and more recently mini umbrella company fraud. HMRC are clear that they regard such activities as tax avoidance so getting involved with one could land you in seriously hot water with the tax man, so a massive BEWARE!
Myth #2 “I won’t get the same benefits as traditional employees”
Another myth often circulated is that umbrella workers lose their employee rights, making them more vulnerable and worse off. This is untrue. As employees of an umbrella company, contractors retain essential rights. These include the right to the National Minimum Wage, Statutory Sick Pay and Maternity / Paternity Pay.
As far as compliant umbrella providers are concerned, employed means employed; and that’s for benefits as well as tax purposes.
Umbrella company employees also get the same statutory benefits as permanent employees in terms of a workplace pension, holiday pay, and insurance cover.
Myth #3 “With an umbrella company I’m paying the Employer’s National Insurance”
This is something that the unions and certain elements of the press love to jump upon. Most commonly they misrepresent the Umbrella rate as the worker’s “top line”.
The key thing to remember is that there is a difference between the Umbrella assignment rate and the worker’s pay rate. The Umbrella assignment rate is the amount paid by the agency or client to the Umbrella Company to cover all the costs of the services delivered, and the umbrella margin. The worker’s pay rate is increased (aka “uplifted”) to give the umbrella assignment rate to cover all of the costs of employing the worker, including Employers National Insurance, Apprenticeship Levy, Employers Pension Contributions and holiday pay, as well as the umbrella company operating costs and margin.
The worker’s gross pay rate is the amount paid to the employee before deductions for PAYE tax and Employee’s National Insurance.
Myth #4 “Umbrella companies are only around because of IR35”
Not true! Umbrella companies have been around for over 20 years, so the suggestion they were only created to capitalise on changes to IR35 is wholly inaccurate. Umbrella companies have always offered a simpler, more stable source of income, especially for those juggling multiple projects or moving assignments frequently.
Having said that, the 2017 and 2021 Off Payroll changes brought about an increased shift to umbrella company working, as clients re-assessed the viability of engaging with limited company contractors (PSCs). Unfortunately this lead to a surge in non-compliant providers offering deals that were too good to be true (see Myth #1!), so contractors need to be on more on their guard than ever.
Myth #5 “An umbrella company is just a payroll company”
The purpose and value of a good umbrella company goes far beyond the simple payroll function. Some critics argue that umbrella companies are costly and do not offer any advantages for contractors. While it is true that umbrella companies deduct a margin for their services, these costs are typically transparent and agreed upon upfront.
Certainly at Liquid Friday we take our employer responsibilities very seriously and that means more than having the right contract with our workers and getting them paid. Our market-leading contractor package includes on-demand advances, free mortgage advice and private healthcare, and that’s just for starters. Find out more about the benefits of working with us.
De-bunking the myths
The above are just some of the myths that persist about umbrella company working in the UK. These misconceptions have arisen largely because of non-compliant elements of the market that want to exploit contractors.
The only way to create a level playing field in the umbrella company industry is with government regulation. Until then, it is essential to dispel these “urban legends” of the umbrella industry so that contractors can make informed decisions about their employment arrangements.