True or false: Common umbrella company myths

Woman with umbrella

Umbrella companies offer a way for contractors to get paid under continuous employment. However, there are some common misconceptions around their service offering. This is partly due to a number of non-compliant, unregulated companies entering the market following updated IR35 legislation.

In this article, we’ve clarified whether the most common beliefs around umbrella companies are true or false.


“Umbrellas were only set up to capitalise on IR35”

FALSE: There was a surge in non-compliant umbrella companies following the introduction of IR35 reforms in 2017. These types of companies offered deals that were too good to be true to contractors who wanted to ensure their take-home pay wasn’t compromised. It’s important to remember not every umbrella company setup in recent years follow this malpractice.

However, umbrella companies have been around for over 20 years to offer a more stable source of income for those working on multiple projects.


“Umbrella companies are scams”

FALSE: Yes, some unregulated umbrella companies exist, but established and compliant ones aren’t unethical. They serve to provide a legal employment structure for contractors who want to reap the rewards of employee status. Plus, the company will make the correct deductions of tax and National Insurance (NI), which limited companies sometimes come under fire for.

Contractors should research their options to ensure the umbrella company they choose is regulated and not overpromising. Any company who are members of the Freelancer and Contractor Services Association (FCSA) will have been thoroughly audited to ensure their practices are legitimate. Other important accreditations to look out for as a trust signal are Professional Passport and The Association of Professional Staffing Companies (APSCo).


“Umbrella companies ‘rip you off’”

FALSE: Umbrella companies make their money by deducting a small weekly or monthly margin (usually around £25 weekly / £100 monthly), but this can be proportionate to the amount the worker is earning. In return, employees will receive employment benefits that limited companies and agency workers don’t. The only difference in salary per umbrella company is the margin they charge.

While take-home profit can be higher operating as a limited company, paid leave is not included and there’s a significant amount of administrative responsibilities required. Compare umbrella PAYE, agency PAYE, and limited companies.


“You keep most of your pay with an umbrella company”

FALSE: An umbrella company that claims employees will receive a suspiciously high amount of take-home pay is almost certainly too good to be true.

Let’s compare choosing an umbrella company to receiving job offers for full-time work. You’d most likely go for the business with a great reputation and reliability over the one offering a higher salary but with questionable business practices. Getting paid correctly and on time is a priority over short-term gain, avoiding unnecessary fines by HMRC.

Compliant umbrella companies will deduct income tax and NI contributions as any other employer would, so there’s a limit to the take-home percentage. They may also differ in the margin they take from a contractor’s pay for their services.


Devices on table


“Joining an umbrella company means you aren’t self-employed”

TRUE: When a contractor joins an umbrella company, they become an employee, meaning they have access to worker benefits. While they will be able to work across multiple assignments, they still receive continuous employment. This makes umbrella PAYE ideal for those who are looking to apply for a mortgage or loans (e.g. phone contracts, etc).


“Your benefits will be different to a standard employee”

FALSE: When a contractor joins an umbrella company, they become an employee. This means they receive the same rights and benefits as permanent workers. Standard benefits include holiday, sickness, and parental leave, while some companies may include additional benefits like professional indemnity insurance.

Compared to operating as a limited company, employees receive benefits like continuous employment and one tax code.


“You’ll be exempt from IR35 as an umbrella contractor”

TRUE: Contractors become employees under an umbrella company, and IR35 affects those who appear to be treated as full-time employees when they aren’t. This applies to sole traders, agency workers, and limited companies. In short, this means all umbrella companies are IR35 compliant. Read more about IR35 and umbrella companies.


“You can’t claim as many expenses under an umbrella”

FALSE: Umbrellas used to offer the ability to make a myriad of claims. However, since Supervision, Direction and Control legislation was introduced in 2016, contractors weren’t able to claim for Travel and Subsistence. Expenses paid by the client are excluded from this.


“You must join a pension scheme under an umbrella company”

TRUE: Umbrella companies must enrol employees into a pension scheme. Despite this, contractors can choose to opt-out after their first contribution.  A good umbrella company will discuss the details of this when they welcome a new employee.


“Umbrellas deduct additional National Insurance contributions”

FALSE: Contractors under umbrella companies are employed by the umbrella and not the end client. This means the umbrella company is responsible for deducting employers’ NI contributions.

An assignment charge is charged to the end client, factoring in NI deductions, margins, and employee benefits. For this reason, the rate can sometimes be uplifted to cover deductions. Many contractors assume deductions will be taken out of their gross pay (before taxes), but this isn’t the case.


“You’ll receive more benefits from more expensive companies”

FALSE: Paying more doesn’t necessarily mean the service or benefits will be better. However, some companies take a higher margin to be able to provide a better service. Others may provide additional benefits like professional indemnity insurance which can increase the amount charged. Contractors must always research umbrella companies, even if recommended by their recruitment agency – who may receive commission.


“Umbrella companies aren’t legal”

FALSE: Umbrella companies offer a completely legal way to be paid as a contractor. However, as we’ve covered, you should complete due diligence when looking for a provider to ensure they are compliant. Luckily, it’s usually very obvious when an umbrella company isn’t abiding by industry regulations.


Learn more in our complete guide to umbrella companies.

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