Choosing an umbrella company

As a freelancer what should you be looking for in an umbrella company?

If you are self-employed, you will need to decide how to run your freelance business. The three most common routes are becoming a sole trader, running your company as a limited company or becoming an employee of an umbrella company. IF you decide to go down the umbrella company route then there are multiple things that you should consider and keep in mind:

Essentially, they are all governed by the HMRC (Her Majestys Revenue and Customs). This means that your earnings with one cannot be any higher than they would be with another; the only variance should be the fees that the umbrella company charges.

A reputable umbrella company should not charge you according to what you earn. There is no more work involved, for the umbrella company, if you earn £50 per day or £500 per day. If you are quoted a percentage of your earnings as a fee you should ensure, through careful calculation, that you will still be paying a reasonable amount – average fees are between £15 and £25 per week.

The only way of receiving payment through a third party, post-2007 budget, is through PAYE. Your umbrella company should be deducting income tax and national insurance contributions from your earnings. Any other payment structure e.g. dividends, loans etc has been declared illegal by the Government and, despite what some unscrupulous companies may tell you, there are no loopholes.

What are Umbrella Company Dispensations? 

A dispensation is purely a list of expenses that your umbrella company is not compelled to record on a P11D. Normally when expenses are paid to an employee a Company is required to complete a P11D. A dispensation means this is not necessary for umbrella companies for those expenses which it covers. All umbrella companies have dispensations.

Umbrella companies cannot dictate what an individual can claim as expenses – only the Inland Revenue can do that. Some companies advertise a ‘special dispensation’ and imply that the expenses listed are those that you are entitled to claim, this is not the case. To claim a cost as an expense you must be able to prove that it is ‘wholly and exclusively incurred in carrying out the duties of the employment’. Basically, if you haven’t spent it you can’t claim it if you can’t prove you spent it you can’t claim it and if you can’t prove that you incurred the cost because of the contract you can’t claim it.

Still within the thorny subject of expenses – you must, therefore, obtain a receipt for any and every expense that you claim. If you claim an expense and you cannot prove that you have incurred the cost an Inland Revenue investigation would result in you having to pay the underpaid tax; if the Inland Revenue considered that you were trying to avoid paying tax by falsifying expense claims you could also be fined. Any umbrella company that claims that you are protected from Inland Revenue investigation is lying – it is simple as that!

All umbrella companies will advertise that they are IR35 compliant simply because the legislation becomes irrelevant as you have no option but to be paid via PAYE. However, the Inland Revenue will never ‘approve’ an umbrella company or their expenses policy and you should be wary of any company that makes such a claim.

How to choose an Umbrella Company?

When researching potential umbrella companies it would be a good idea to also ask if there are any hidden costs or penalties for leaving the umbrella company. This will ensure that you know all the risks and rewards before entering into a contract. 

Personal recommendation is a good indicator when making your decision. However, also keep in mind that some agency recommendations may come from 'incentives' which are given by the umbrella company.

To conclude – if you decide to go with an umbrella company and are carrying out your research then make sure to remember that if it seems too good to be true then it very probably is!

More on umbrella companies for freelancers.

There is also a comprehensive list of umbrella companies on sister site, Contractor UK.


9th May 2007

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