10 Common Umbrella Company Myths


The umbrella company structure allows contractors a way of getting paid under continuous employment. This has brought about a lot of common misconceptions around umbrella company’s service offerings. In large this is due to numerous non-compliant and unregulated companies entering the market off the back of the updated IR35 legislation.

This post aims to clarify the most common misconceptions surrounding umbrella companies, giving you a true or false verdict on each.

1. “Umbrellas are set up to capitalise on IR35”

FALSE: Umbrella companies have been around for over 20 years, therefore this claim umbrella companies have been set up to capitalise on IR35 is inaccurate. Umbrella companies offer a more stable source of income for contractors, especially when working on multiple projects.

However, there was a surge in non-compliant umbrella companies post-IR35 reforms in 2017. They tended to offer amazing deals which were as expected, too good to be true.

2. “Umbrella companies are scam artists”

FALSE: Like any industry, there are inevitably scam artists or rip-off merchants, but to tar, every umbrella company with the same brush is unfair and unfounded as there are plenty of established and reputable umbrella companies who operate in an ethical manner.

The legitimate umbrella companies provide a legal employment structure for contractors, allowing them to benefit from the same rewards of permanent employee status. Also, umbrella companies will deal with deductions (tax and national insurance, allowing contractors to focus on their work.

It is worth contractors researching umbrella companies before they choose, it is worth checking if they are regulated too. They should be members of the Freelancer and Contractor Services Association (FCSA), they also thoroughly audit their members before they are allowed to join to ensure their practices are legitimate. Other accreditations to keep an eye out for are Professional Passport and The Association of Professional Staffing Companies (APSCo).

3. “Umbrella companies will rip you off”

FALSE: If the umbrella company is legitimate they will not rip you off, they make their money by deducting a nominal weekly or monthly margin (roughly around £25 per week or £100 per month), although it can vary proportionately to the worker’s earnings as naturally if their worker is on a low wage it wouldn’t be fair to hold them to the same margins as someone who is earning twice as much.

4. “You get to keep almost all of your pay with an umbrella company”

FALSE: If an umbrella company is claiming you will take a very high amount of take-home pay, it is likely that they are not operating compliantly and is too good to be true.

To give another analogy on this subject, if you receive two job offers for work you’re most likely to go and work for the company with a stellar reputation and known for being a more secure and reliable employer over the one with a higher salary but questionable business practices. It is better to get paid less but getting paid on time and correctly over the employer who causes all sorts of hassle, pays incorrectly, and lands you in hot water with HMRC.

5. “You’re not self-employed when you join an umbrella company”

TRUE: When a contractor joins an umbrella company, they are then an employee of that company, allowing them to receive the same benefits permanent workers receive. While also being able to work across multiple contract assignments. It is the ideal working structure for those looking to apply for a mortgage, loans, phone contracts, or any other product or service which requires credit checks.

6. “You will be exempt from IR35 as an umbrella contractor”

TRUE: A contractor becomes an employee when they join an umbrella company, whereas IR35 affects those who seem to be treated as full-time employees but aren’t. This tends to apply to sole traders, agency workers, and limited companies. Essentially all umbrella companies are IR35 compliant so you needn’t worry.

7. “You’re not able to claim as many expenses under an umbrella company structure”

FALSE: Since Supervision, Direction, and Control legislation came into force in 2016, contractors have not been able to claim for Travel and Subsistence. Expenses paid by the client are excluded from this meaning expenses can be claimed as normal.

8. “You’re required to join a pension scheme when joining an umbrella company”

TRUE: It is a requirement to enrol employees into a pension scheme when they join an umbrella company. However once enrolled you’re free to opt-out beyond the first contribution. Any umbrella company worth their salt will discuss the pension scheme details with you when welcoming a new employee.

9. “Umbrellas deduct additional National Insurance contribution”

FALSE: Contractors are employed by the umbrella company and not the end client. It means umbrella companies are responsible for NI contributions. Each assignment is charged to the end client as they are the ones paying for and receiving the work, factoring in NI deductions, margins and employee benefits along the way.
This means, in some cases, the rate can be uplifted to cover deductions. In a lot of cases, contractors make the assumption deductions will be taken from their gross pay (before taxes), however, this isn’t the case.

10. “You will receive better benefits from the more expensive umbrella companies”

FALSE: Just because you pay a higher margin doesn’t necessarily mean the service or benefits will be relative to this. Although there are some companies who take a higher margin to allow them to provide a better service. Other extras some umbrella companies provide include professional indemnity insurance, which can increase the amount charged.

We always advise contractors to research umbrella companies, even if you’re recommended to them by your recruitment agency as in a lot of cases they receive a commission for those referrals.

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Contact us at 0203 744 1229 or email us at hello@evolvecs.co.uk and start your journey today with Evolve CS.