Umbrella company myths: Sorting fact from fiction

Umbrella companies are there to make your life as a contractor much easier. By handling a freelancer’s taxation, invoicing, expenses and other important matters, you can focus on other aspects of your work, such as your current contract, finding your next job or achieving the best work/life balance possible.

With HM Revenue and Customs (HMRC) and the Treasury constantly clamping down on tax frauds, more contractors are now in need of concise information regarding legitimate ways to work and pay tax.

Umbrella companies are surrounded by a number of myths and misconceptions that affect how a contractor uses the service. Add to this the fact that the market has become very competitive over recent years and it’s easy to see why contractors may need a little help in order to differentiate the honest, legitimate firms from those who do not provide a proper service.

Before you consult any umbrella company reviews, it is helpful to know about some of the common myths that often occur on this topic.

In this article some of those myths are dispelled.

Different companies charge different tax rates

Every umbrella company is governed by the same set of tax rules which have been established by HMRC. Any fIrm that promises lower taxes cannot actually provide this service to you and should probably be avoided.

A dispensation means you do not have to keep receipts

Regardless of whether you have a dispensation or not, you must always keep your receipts. A HMRC dispensation helps to reduce the amount of paper work that an umbrella company has to carry out and that you don’t have to physically send to the firm. However, you should always keep a record of your receipts just in case HMRC do ask for proof of your expenses.

Switching umbrella companies allows contractors to avoid the 24-month rule

Changing your umbrella company does not enable you to avoid the rules of the 24-month rule. This is due to the fact that the regulations apply to your physical place of work and not your umbrella company.

Working through an umbrella company makes a contractor immune to an HMRC investigation

Nothing can stop the HMRC from investigating you if the body believes you are committing tax fraud of any kind. It is the organisation’s job to clamp down on tax evasion and avoidance and if you are found guilty of such activity you could be landed with serious financial penalties or worse.

My income is made up of a salary and dividends

This is true for a contractor who works through their own limited company, however, this is not the case for an umbrella company employee. By working in this way you will be paid a gross salary and expenses.

Umbrella companies are “HMRC approved”

There is no such thing as “HMRC approved”. Everyone has to abide by the same tax regulations and so any firm claiming to have an individual accreditation should be scrutinised closely.