The 8 top questions about umbrella companies answered

The 8 top questions about umbrella companies answered

Contractors who choose to work through umbrella companies mainly do so because they want to get on with what they do best – using their skills and talents to earn a living – rather than using up precious time and effort to manage the administrative burdens of running their own limited companies. They want familiarity with their employment rights and peace of mind knowing that they’ll be paid on time, claiming expenses they’re entitled to in the process.

But there’s a problem. Employment legislation is constantly changing, and reputable umbrella providers work valiantly to keep up to date and compliant with it. Yet they can’t control the misinformation that arises when legislation changes – misinformation that can occasionally plunge contractors into needless anxiety, leave them missing out on expenses they are in fact entitled to. They might even face legal compliance challenges because of this misinformation.

Here are the top eight questions and their factual answers:


1. Why is it that I don’t have a set payday?

This boils down to the mechanics of timesheet submissions. Umbrellas get paid when agencies release the contractor’s earnings to them, but that always comes after the contractor has submitted a timesheet (the amount rests on the payment terms agreed between the agency and the umbrella service provider). These factors make it impossible to pay contractors on a fixed monthly or weekly date. Typically, though, umbrella services will transfer funds to the contractor on the day they receive payment from the agency (or very shortly afterwards).


2. If my umbrella has a dispensation, why must I keep receipts?

Don’t fall for stories about HMRC-approved expenses limits. They’re completely wrong. That’s not what a dispensation means. If contractors incur, say, travel and subsistence costs and wish to recoup the expenses, they must provide receipts. As Sweetman puts it:

“A dispensation is not an expenses ‘get-out-of-jail-free’ card from HMRC. When a dispensation is granted to a business by HMRC, it simply means that the umbrella company does not have to provide a separate P11D for each contractor employee. It certainly does not allow contractors to claim expenses ‘allowances’ without receipts.”


3. What is the “two-year rule” and does it apply to all umbrella contractors?

This rule (which is sometimes referred to as the 24-month rule) does indeed apply to all workers, including contractors. It comes into force whenever a contractor has worked at the same site for a client for 24 months, whereupon the workplace is no longer considered a temporary one and is reclassified as permanent. The rule also applies at the point when a contractor knows that they’ll be working at the same site for more than 24 months (for example, after negotiating an extension). The significance for contractors is that they will no longer be permitted to claim travel and subsistence expenditures to offset against tax once the workplace has been redesignated as permanent.


4. Why must I pay employer’s National Insurance Contributions (NICs) as an umbrella contractor?

Both permanent workers and contractors pay employer’s NICs. The chief difference is that contributions from employers are ‘invisible’ for permanent workers. Employer’s NICs are factored into a contractor’s pay rates, which is one of the reasons why they typically earn more than their permanent counterparts. Essentially, contractors pay their own employer’s NICs from their gross income.


5. Do I lose statutory employment rights when I begin contracting through an umbrella service?

Definitely not. Umbrella contractors are employed by their umbrella company and, as with any other employees, umbrella contractors are entitled to the full range of employee benefits, such as holidays, statutory sick pay and maternity and paternity benefits.


6. Will my IR35 status be affected if I begin contracting through an umbrella?

This is an issue that umbrella contractors need not worry about as IR35 is totally irrelevant to them. They are employees of the umbrella, which means that IR35 is never an issue for them. It affects only those contractors who work via their own limited companies.


7. Rechargeable expenses and business expenses – what’s the difference?

For umbrella contractors, business expenses refer to routine costs such as those incurred travelling to and from their temporary workplace and subsistence. For contractors working away from home, these expenses would also cover the cost of hotel accommodation, breakfast and evening meals. These expenditures are submitted weekly or monthly and are deducted from gross income, which reduces a contractor’s tax liability.

If, however, a client wishes a contractor to visit the company’s Barcelona office, the client agrees to repay the costs of flights, car hire and meals but usually the contractor incurs these expenses initially out of their own earnings. This is a “rechargeable expense”: the contractor enters these costs on that week’s (or that month’s) invoice and will then receive full reimbursement for the additional costs with their regular billed time fees.


8. Do I become an employee when I sign up with an umbrella provider?

The short answer is yes. You’ll receive a contract of employment along with all the statutory rights and benefits that employee status bestows. It’s good practice to insist on having a copy of that contract as your responsibilities will also be included in it.

Because the umbrella provides employment rights, contractors signed up with these services can expect no rights from end clients. As umbrella company employees, contractors have no contractual relationship with either an end client or an agency. Those official relationships are with the umbrella company, not the contractor.

While the umbrella deals directly with the agency or client, contractors working in this way are classified as its employees and therefore receive all the benefits that come with employment. If contractors were not legally employed by their umbrella companies, they would not be permitted to claim any expenses and offset them against tax.

We advise that contractors consider switching providers if they are working for an umbrella that fails to offer them full employment status.

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