Top 4 umbrella myths debunked

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It cannot be denied that contracting has become increasingly popular in recent years. What used to be defined as the by-product of a faltering economy has now become a way of life for millions of professionals.

However, there are a number of myths that could prevent would-be freelancers from making the leap and ditching “traditional” employment. Meanwhile, other falsehoods may land unwitting contractors in hot water with HMRC.

To help, we’ve created this handy guide to dispel these myths and help more people take control of their own destiny.

I can keep 90% of my pay with an umbrella company

Compliant umbrella companies employ contractors and operate Pay As You Earn (PAYE) income tax and National insurance contributions. In addition, providers must adhere to the National Minimum Wage and process holiday pay.

These expenses are governed by law and apply for all workers. It is therefore inconceivable that a compliant umbrella company would be able to allow contractors to keep such a high percentage of their earnings.

As a result, the only difference between compliant umbrella companies should be the margins they retain and the amount a contractor claims in legitimate business expenses.

HMRC is placing greater emphasis on cracking down on non-compliant employment solutions, so it would be wise to discount any umbrella company that claims to offer anything that seems too good to be true. Failure to do so could see your own tax affairs come under the microscope.

I won’t get the same benefits as “traditional” employees

Because contractors are employees of an umbrella company, they are automatically afforded the same rights and benefits as permanent workers. This means that compliant providers, such as Parasol, will provide freelancers with holiday pay, sick pay and maternity & paternity pay as standard.

In addition, freelancers are able to take out insurance policies to cover any prolonged periods off work. Prices vary depending on the type of cover you take out and your current state of health. More information on this can be found here.

I don’t need to keep expenses receipts with an umbrella company

While this is true to some extent, contractors will still need to hold on to the majority of their receipts when claiming expenses. As mentioned above, HMRC is placing greater emphasis on tackling tax avoidance and could therefore conduct an audit at any time. Compliant umbrella companies will also carry out random spot checks to ensure the rules are being adhered to.

It is therefore recommended that contractors keep hold of all their receipts, just to be on the safe side. By doing this, they can ensure they have nothing to fear if the taxman comes calling.

I’ll be subject to IR35 as an umbrella contractor

The IR35 rules are designed to prevent false claims of self-employment, and as such only apply to Limited companies and sole traders. Remember that umbrella firms directly employ contractors and operate PAYE, meaning they are outside the remit of IR35.

As a result, umbrella companies cannot justly claim to be IR35 compliant as they are by definition exempt from the rules.

Need more advice?

If you’re thinking about making the leap and pursuing a contracting career, Parasol can help. Our dedicated team is always on hand to answer any query you may have. We pride ourselves on giving our contractors the best advice, while helping them stay on the straight and narrow at all times.

For more information about what Parasol can do for you, please call 0800 458 0818 or email