Common Myths Surrounding Umbrella Companies

If you have come to the conclusion that working as a contractor is the best way forward, you will need to decide whether you want to provide services through your own limited company or employ the services of an umbrella company.

To make this decision, you need to know the pros and cons of both options and understand how each of them work.

There are many myths and misconceptions surrounding the benefits and drawbacks of limited companies and umbrella companies.

Below, we look at some of the most common myths concerning umbrella companies and explain why they are inaccurate.

Some umbrella companies can save me more in tax than others

This is one of the biggest misconceptions surrounding umbrella companies.

HMRC sets tax rates and the amount of tax is in no way dependent on the umbrella company you choose.

The amount of tax you pay depends on your National Insurance Contributions (NICs), your personal tax code and other factors.

I do not need to keep receipts because my umbrella company has a dispensation

You must keep receipts for all the expenses that you claim and any company that says otherwise should be viewed with caution. Receipts prove that your expenses have been legitimately incurred.

When I breach the 24-month rule, I can switch umbrella companies and continue claiming expenses

This is another common misconception.

Transferring to another umbrella company will have no bearing on the 24-month rule, as it applies to your actual workplace as opposed to the actual company you work through.

When you reach or expect to reach 24-months, a workplace is deemed a permanent site and if you spend more than 40 per cent of your time there, you will not be able to claim travel and subsistence costs.

Umbrella companies can be approved by HMRC

There is no official standard when it comes to umbrella companies and HMRC does not endorse or support specific companies.

While HMRC does approve the way in which these organisations operate, there is no such thing as an HMRC-approved umbrella company.

I am immune to HMRC investigations by working through an umbrella company

Any inaccuracies concerning your personal taxes will leave you open to an investigation from HMRC. By working with a legitimate umbrella company however, you can rest assured that your tax and NICs will be deducted appropriately

I can take home 85 per cent of my gross pay

Any umbrella company that claims it can give you 85 per cent of your gross pay should be viewed with caution. This claim is simply untrue.

Some umbrella companies can get you more money than others however, the only way they can do this is by reducing their own margin.

There are many myths and misconceptions concerning umbrella companies, which is why it is essential that you do plenty of research and seek independent advice before you commit to anything.

As a general rule of thumb, claims from umbrella companies that seem too good to be true most probably are and you must ensure that you select a reputable company with a strong emphasis on compliance and one that aims for the highest standards of behaviour.

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