Contract-based jobs are highly lucrative and mutually beneficial work arrangements that are gaining popularity at a fast pace. An important stakeholder in this sector is umbrella companies or PAYE Umbrella firms, which are brimming with opportunities while helping organize the sector’s workforce. These companies allow self-employed people to work under them as employees, saving them from the hassles of setting up their own companies.
But many doubts and myths about such companies make people skeptical about working with them. This guide covers 7 major myths about umbrella companies to help you understand them better for making informed decisions.
- “Umbrellas are set up to capitalize on IR35.”
That is an untrue statement. Umbrella companies have been around for much longer than the IR35 reforms in 2017. Yes, there was a rise in the number of companies overall, but many companies have been around since the 2,000s. These companies offer a stable way for contractors and self-employed people to operate. The IR35 is a beneficial tax reform that adds to their list of benefits, but that is not the only thing such firms have to offer.
- Umbrella employment is a scam.
This myth can be cleared up with two facts. Firstly, the contract-based work sector is highly unorganized. Secondly, there is a possibility of scams in every sector, but the 1-2 firms engaging in such activities do not represent the idea of umbrella companies as a whole.
These companies are created to provide a legal employment structure to people in a largely unorganized sector. You can always look at accreditations from the Freelancer and Contractor Services Association (FCSA) or The Association of Professional Staffing Companies (APSCo) to determine if the company you are considering is legit.
- “Umbrellas deduct additional National Insurance contributions.”
This statement is false as the contractors are under the employment of the umbrella company and not the end client. In many cases, contractors can assume that the deductions will be made from the income before taxes, but that is not the case. Therefore, the work or service can be charged while keeping these deductions in mind, and contractors can increase the charges to accommodate them without impacting their projected earnings. This way, the deduction amount can be charged to the end client.
- “You will receive better benefits from the more expensive umbrella companies.”
There are a few companies that take more charges to offer more direct and highly useful benefits, but this is not the case for all umbrella companies. The idea is to keep the charges proportional to the services offered, and you can compare various umbrella companies to find out what kind of services they offer and if those are value-for-money from your perspective or not. But regardless, there are some core benefits of working with umbrella companies.
- Umbrella companies are only after your money.
Considering the umbrella company you are looking at is compliant, it would be operational under the same government rules, laws, and guidelines as any other employer. They earn all the charges and taxes they have to pay to be operational, from the “Umbrella” services to contractors. These services require charges from the contractors’ total pay or margin, which is clearly described in your payment details.
- Umbrella companies don’t provide the same benefits as those permanently employed.
This statement is false. Since umbrella companies operate under the same government mandates, all contractors working under them are entitled to the same benefits, such as paid leaves, paternity pay, maternity pay, pension contributions, and other statutory benefits. For compliant companies, the scope of employment also covers benefits, just like taxation.
- You don’t need to keep records of your expenses.
Yes, you have a full-fledged company to cover the nitty-gritties such as record keeping, but that does not mean you don’t need to keep track of the details. You should always have a complete record of all the work arrangements, payments, receipts, and related paperwork. This helps you in situations like tax audits or clearing any confusion regarding the payments.
These are the most common myths about umbrella companies. This guide hopes to clear the air about some misconceptions related to umbrella employment and to give people a clear idea about this work arrangement.
Every work arrangement has its unique benefits and use cases; it depends upon you as an individual as to what suits your needs and what is convenient to you.