When you are looking for an Umbrella Company there are a number of things that you should bear in mind.
Essentially, Umbrella Companies are all governed by HMR&C. This means that your earnings with one cannot be any higher than they would be with any other; the only variance should be the margin that the Umbrella Company retains.
A reputable Umbrella Company should not base their margin on a percentage of your assignment value as there is no more work involved, for the Umbrella Company, if you earn £50 per day or £500 per day. Since the introduction of the Agency Worker Regulations, some umbrella companies have been using the legislation as an excuse to make unlawful deductions. and as you will enter into a Contract of Employment with the umbrella company so you should ask for a detailed breakdown of all deductions before committing to anything.
The only way of receiving payment through a third party is through PAYE, so your Umbrella Company should be deducting income tax and national insurance contributions from your earnings. Any other payment structures e.g. dividends, loans, FX schemes etc have been deemed to be tax avoidance schemes and therefore unlawful; despite what some unscrupulous companies may tell you, there are no loopholes. You can also not receive dividend payments except via your own Limited Company (or Personal Service Company); for more details on the relevant legislation please click here.
Approved Umbrella Company
Despite some rather grand claims, the fact is that HMR&C will never ‘approve’ an Umbrella Company or their expenses policy and you should be wary of any company that makes such a claim.
Personal recommendation is a good indicator when making your decision but bear in mind that some agency recommendations may come from ‘incentives’ which are given by the Umbrella Company; recommendations from fellow contractors who have had experience of the service offered are likely to be far more valuable.
To sum up – when you are considering which Umbrella Company to use – if it all seems too good to be true then it very probably is!
To see what employees of ContractorUmbrella have to say about our services please visit our testimonial page.
Umbrella Company Expense Claims
**** Expenses and Umbrella Companies Post 6th April 2016: Please note as of 6th April 2016, no "compliant" umbrella company will be able to process non-chargeable expenses for tax relief purposes due to a change in Legislation included within the Finance Act 2016. Click here to find out more... ****
ARCHIVED PAGE AS OF 6TH APRIL 2016
Umbrella Companies cannot decide which costs should be allowable as expenses – only HMR&C can do that. Some companies advertise a ‘special dispensation’ and imply that the expenses listed are those that you are entitled to claim, this is not the case. To claim a cost as an expense you must be able to prove that it is ‘wholly and exclusively' incurred in carrying out the duties of your employment. Basically, if you haven’t spent it you can’t claim it, if you can’t prove you spent it you can’t claim it and if you can’t prove that you incurred the cost because of the contract you can’t claim it. For details of the most common misconceptions of using an Umbrella Company please visit our Myths & Facts page.
Still within the thorny subject of expenses – you must obtain a receipt for any and every expense that you claim. If you claim an expense and you cannot prove that you have incurred the cost an HMR&C investigation would result in you having to pay the underpaid tax; if HMR&C considered that you were trying to avoid paying tax by falsifying expense claims you could also be fined. Any Umbrella Company that claims that you are protected fromHMR&C is lying – it is a simple as that!
All Umbrella Companies will advertise that they are IR35 compliant simply because the legislation becomes irrelevant when you work through an umbrella company because you have no option but to be paid via PAYE. IR35 determines the way that you are paid and, if your working practises put you within the scope of IR35, your payments must be processed via PAYE regardless of whether you work through your own Limited Company or through an intermediary i.e. an umbrella company.