Umbrella companies: what their detractors don’t want you to know

Despite the important role that umbrella companies play in supporting contractors, providing all employment rights and ensuring tax and NICs are paid, there are numerous misunderstandings about how umbrellas work in practice.

Five ‘myths,’ if you will, still doing the rounds, writes Julia Kermode, CEO of the Freelancer & Contractor Services Association.

Myth 1

Hidden charges!

When trade unions first became aware of umbrella companies, they were concerned about the apparent deduction of Employer’s National Insurance from workers’ pay. However this deduction should be factored into calculating the assignment rate i.e. it is in addition to workers’ gross pay. All employers are legally required to pay Employer’s National Insurance, as well process employee deductions.

Good umbrellas have always been transparent about how they calculate gross pay, i.e. that employment costs are deducted from the assignment rate. However, in some instances this has led to the misunderstanding that employees are paying Employer’s NI whereas in fact this amount does not constitute any element of the workers’ gross pay.

If a worker is paid via the agency or end-hirer payroll, the Employers’ NI (and associated employment costs) will still need to be paid in addition to the gross pay – it needs to be factored in somewhere within the supply chain. Good umbrella companies explain and provide illustrations of these deductions prior to the employment contract being entered into.

Myth 2

Umbrellas are a scam!

Umbrella firms have never been a scam. They offer a legitimate contractor management solution that enables individuals to receive all benefits of employment while working on numerous different assignments. Good umbrella firms are wholly transparent in their dealings with workers, providing them with a clear contract of employment, all statutory rights and benefits, and transparency in how their pay is calculated.

Myth 3

No advantages to an umbrella!

Contractors working through an umbrella company are by definition employed by that umbrella firm, and therefore have access to all statutory rights and benefits of employment. This includes annual leave, maternity, paternity, sick pay and pension contributions, and all of these rights are provided for by the umbrella company. If they aren’t, it’s not a proper umbrella!

Myth 4

No pension for self-employed umbrella users!

This is fundamentally incorrect. Umbrella firms employ contractors. Anyone working through an umbrella is by definition employed, and not self-employed. By being employed, anyone working for an umbrella firm has the same pension rights as any other type of employment, and all of these rights are provided for by the umbrella. Every umbrella firm must provide a pension scheme and automatically enrol employees into it, just as every UK employer does, under the Pensions Act 2008.

Myth 5

Umbrellas are a new type of entity!

Umbrella companies have been in existence for more than 15 years. They were formed to service the requirements of professional contractors undertaking a series of assignments who needed specialist back-office support to take care of their tax affairs. Umbrella firms evolved to meet this requirement, enabling contractors to carry out their assignments without also needing to become skilled financial specialists to run their own affairs.

Final thought

So don’t accept these fanciful five when you hear them! And unfortunately you are possibly more likely to hear them – or see them written down on marketing material you receive, because scheme providers are increasingly trying to pose as umbrellas to get contractors to sign up. ‘We’re a new type of umbrella’ (myth 5) and ‘conventional brollies can’t help you’ (myth 3)  are among the falsities being peddled. Buyer (and contractors) beware.