Umbrella employment – the facts

Whilst tens of thousands of contractors are employed through an umbrella company like Umbrella Plus, the rules that govern how we operate are often misunderstood– occasionally giving rise to myths that are incorrect.

In this article, we explain the truth behind three of the most common myths we hear about from contractors when they contact us to seek advice on which working option is right for their current circumstances.

Myth #1: There are no benefits to umbrella employment

The purpose of an umbrella company is to provide an employed based payment solution for contractors.

Essentially, being employed by an umbrella company gives you freedom to undertake a series of temporary assignments via any number of agencies or hirers whilst having continuity of employment with all* statutory rights and benefits. The umbrella company achieves this by entering into an employment contact with you the worker, and a service contract with the agency.  *Julia Kermode ( CEO at Freelancer & Contractor Services Association)

Key benefits of joining an umbrella company

• Employment rights, including all statutory rights and benefits such as holiday pay, maternity, paternity, sick leave, pension etc.
• Continuous employment history whilst working on a variety of temporary assignments (important in securing access to finance, housing/mortgages, etc.).
• Consolidates your earnings (potentially from multiple assignments for different end hirers) providing peace of mind that appropriate taxes are paid.
• Human resource support, in the unlikely event that you need HR advice, such as a grievance case.
• Ability to claim travel expenses subject to status (see below for further information).

Myth #2: Employer’s National Insurance is deducted from a worker’s pay

The short answer is no – it is not.

It is because you are employed by an umbrella company that you are entitled to employee rights. When you work through an umbrella company, the costs of employing you (including Employers NI) are paid from the charge that the umbrella company invoices the recruitment agency. On your payslip this is referenced as ‘Company Income’.

Your pay is only one part of the cost of employing you. Other employment costs which an employer is legally required to pay include: Employer’s National Insurance, holiday pay and pension contributions. The company income that an umbrella company like Umbrella Plus receives from the agency comprises of all employment costs including your gross pay.

Your gross pay

Your gross pay is defined as an employee’s pay prior to the deduction of Income Tax, Employee’s National Insurance and specific deductions e.g. student loan. All UK umbrella companies operate PAYE. This means that you will pay your tax as you go along. .

• Your National Insurance contributions are deducted as a percentage of your earnings and this percentage is identical for all companies.
• Income tax calculations are personal to you. Everyone has a tax code which determines their tax-free pay. The standard tax code for 2017/18 is 1150L, which means you can earn £11,500 in a year before you have to start paying income tax. Every pound you earn over your tax-free allowance will be taxed at 20% up to £33,500; every pound you earn between £33,501 and £150,000 will be taxed at 40% and finally, any earnings above £150,000 will then be taxed at 45%.

There will also be a deduction of a small pre- agreed retained income that the Umbrella company charges for the services they provide.

After these deductions have been taken what is left is an Employee’s Net Pay or in other words your take-home pay.

Myth #3. Umbrella employees can’t claim expenses

HMRC applies strict rules on what does and does not constitute a legitimate business expense and it’s important to understand their guidance so that you are not out-of-pocket whilst remaining compliant.

What can you claim for?

HMRC’s rules state that contractors may be able to claim for the following:

• Uniforms and work clothing – cleaning, repairing or replacing specialist clothing such as your uniform or safety wear.
• Business mileage or fuel – you can make a claim for business-related mileage or fuel for specific work-related trips, the amount of the claim will depend on whether you are using your own or a vehicle supplied by the hirer. Your right to claim also depends on whether you are subject to Supervision Direction and Control (often shortened to SDC). It’s important to note that you cannot claim for journeys to and from your permanent place of work.
• Travel and overnight expenses such as public transport, hotel accommodation, food and drink, congestion charges and tolls, parking fees.
• Administrative costs – business phone calls and miscellaneous costs such as photocopying.
• Professional fees and subscriptions – these may be claimed if membership is required for your role, or helpful in fulfilling your role.
• Training – you may be able to claim for costs incurred in training and attendance of courses related to your assignment.

How can you claim?

You can claim tax relief on business-related costs and expenses by completing and submitting a P87 claim to HMRC. Claims can be submitted any time after 5th April in the following tax year.

Please note that in order to support your claim it’s important to have kept copies of all receipts.

What to do next

We hope that we have helped to clarify some of the misunderstanding around using an umbrella company. If you are a contractor and wish to find out more about your working options or join our umbrella company, Umbrella Plus, please get in touch on 01244 684700 or complete this form. We will be happy to help.

Further reading you may find helpful:

Contracting Successfully with Crest Plus – A Guide to Your Working Options
From Limited Company to Umbrella – Changing the Way You Work
Is Operating Through an Umbrella Company Right For You?