Umbrella Company Myths
Here are our top myths taken from real discussions with real contractors.
1. All umbrella companies are the same?
NO! Umbrella companies are more than just a means to get paid. They have legal obligations under many UK laws and legislation and have to observe these.
2. Expenses can be claimed without receipts?
HM Revenue and Customs does not generally endorse expenses policies which allow unreceipted expenses. If you are not paying tax and National Insurance as a result of claiming expenses you will need to provide evidence that those expenses are “necessary” and then “wholly and exclusively” incurred for carrying out your work.
3. It is best to have monies paid to me as soon as it is received by my umbrella company, otherwise I’ll lose interest on my money.
Immediate payment might sound attractive, but in most cases if you are paid in this way you will pay more tax and National Insurance and take home less money over a tax year. We call this the immediate payment or max tax option. Your money can be managed more effectively. Contact us to see what Work2live can do for you.
4. Umbrella companies are too expensive. I want one with low fees so I will take home more money.
It is not about what an umbrella company charges you, it is about what money you take home. Umbrella company fees actually save you tax and National Insurance. Think about what the umbrella company does for you. Do they help you find contracts? Will they provide CV advice? Do they proactively work with you to maximise your take home pay? In most cases the service you see is just a payroll service. In practice you get what you pay for. If you want a top car marque don’t expect to pay the price of an old banger.
5. The best umbrella company is the one that offers me the highest return.
Take a close look at the service and the small print. Ask questions! Do not be fooled or luered by high levels of return from on line calculators. Most calculators make assumptions - read the small print. You will find that they assume you are working 52 weeks a year. Who works 52 weeks a year? If you are not asked for blow by blow details of your expenses, assumptions are being made. Assumptions will rarely give you an accurate take home pay. These assumptions are often based on claiming at HM Revenue and Customs limits or expenses that you will not actually be claiming so your take home pay will invariably be higher than stated. You can only claim what you actually spend, so anything else is not realistic. Would you always choose to sell your house with the estate agent that gives you the highest valuation?
6. An accountant will provide a solution to IR35.
Accountants cannot generally solve IR35. They might offer you IR35 insurance, but this suggests that there is a risk. It will not prevent an investigation. Do you want to take the risk or have a peace of mind solution?
7. Contracts are not important.
Your contract with your agency or client is crucially important. Accountants are not geared up to reviewing contracts. Many umbrella companies do not even review the contracts! Is it worth taking the risk that a contract that you sign could deem you a disguised employee of your client? Subjecting you and the client to tax bills, fines and interest?
8. Per diem expenses will save me tax and increase my take home pay.
Claiming expenses at per diem rates, i.e. £5 a day for lunch, is not general HMRC policy. You can only claim what you actually spend. Money that is taken as per diem expenses is tax free. If you have not actually incurred that expense then you cannot offset that expense against your tax and NI.
