Choosing an Umbrella Company

The claims and promises made by Umbrella Companies vary enormously; most of them will sound too good to be true…and they usually are!

The usual marketing ploys to entice new contractors are:

* Higher net pay claims through un-receipted expenses
* Blanket Professional Indemnity Cover
* Promises of protection from HMRC investigation
* HMRC approved
* Advertising their fees at higher rate tax figures
* Cheap starter fees,leading to normal higher fees later on
* IR35 compliant
* Act as Employer
* Agency recommended

Higher net pay through un-receipted expenses

There are currently Umbrella Companies advertising up to 85% retention of your income, which might sound enticing, until you hear the reality.

Certain Umbrella Companies encourage you to claim, whilst others automatically add, an un-receipted meal allowance of up to £36 per day. This is very misleading and can leave you with a very large tax bill and fine.

We can guarantee you that any Umbrella Company making such a claim, will have it somewhere on their website or within their T&C’s that, although they won’t need receipts to process your expenses, you will need them in-case HMRC contact you.

If you find yourself under an HMRC investigation, you will be expected to prove that you have incurred all the costs you have claimed. If you can’t provide receipts to back this up, you will find yourself in a lot of trouble – would you be able to prove that you spent £36.00 per day on meals if investigated?

ContractorUmbrella follows HMRC’s guidelines on expenses very carefully and won’t process un-receipted allowance claims for the reasons above.  We don’t require receipts for expenses covered by our dispensation, but we do perform random spot checks so it may be necessary for you to send us your receipts occasionally. We are very pro-active in ensuring our contractors are compliant – this means you can sleep well at night!

For more details, please visit our Take Home Pay Claims page.

Blanket Professional Indemnity Insurance

Whilst an Umbrella Company providing blanket cover sounds like a great deal, only the most common, low risk, IT roles are covered. We have spoken to several major Professional Indemnity Insurance brokers, who we have confirmed that there are noinsurers or underwriters who would leave themselves open by offering a blanket policy which covers every single IT role on offer.

If your role isn’t covered by the blanket policy, it leaves you wide open to a costly claim. To add insult to injury, you would need to take out a separate policy, whilst also paying for a service that charges you for blanket cover!
If you are considering such an offering, we would strongly recommend asking for confirmation in writing from the Umbrella Company that your particular job role is covered by the policy.

Most contracts that require you to hold PI insurance, will also expect it to cover you for a certain period after the contract has ended. A blanket policy lapses after you leave the Umbrella Company and leaves you unprotected. To solve this you would need to take out costly retrospective cover that dates back to the beginning of the contract.

Furthermore, it is very unlikely, if not impossible, to be covered by a blanket policy without full declaration of activity in the following areas:

  • Medical
  • Aviation
  • Overseas contracts
  • Sectors within e-Commerce
  • Oil & gas
  • Defence

ContractorUmbrella’s chosen insurance provider tailors the policy so it meets your individual requirements. This way you are fully protected and the monthly costs can be claimed as an expense

ContractorUmbrella would like to thank Blyth Valley for their contribution regarding matters relating to Professional Indemnity Insurance.

Promises of protection from an HMRC investigation

No Umbrella Company can offer this despite their claims. At the end of the day it is your tax liability and HMRC will pursue you to reclaim any underpaid tax! The penalties and interest would also be payable by you, regardless of the fact that you were given bad advice.

Why would a company need to offer protection if it’s giving sound advice? ContractorUmbrella is sister company to a specialist firm of accountants, SJD Accountancy, so you can be sure of the advice we give you. Even if HMRC decide to contact you, you will know that you won’t have claimed anything untoward.

“HMRC Approved”

HMRC doesn’t ‘approve’ Umbrella Companies. HMRC will grant an Umbrella Company a dispensation and this is where the misleading advertising begins.

A dispensation is purely to save the Umbrella Company extra admin – all large Umbrella Companies have a dispensation! Without this, the company would need to see receipts for every single expense claim that they process

The dispensation gives maximum amounts for the most commonly claimed expenses, for which the Umbrella Company won’t need to see receipts.

For example, if the dispensation amount for hotel accommodation is £95.00, the company won’t need to see receipts from anyone spending £95.00 or less. This doesn’t mean you should automatically claim £95.00 – if you spend £50, claim £50 and keep the receipt.

For more details read our Dispensations Exposed! page.

Advertise Fees at Higher Rate Tax Figures

Double-check the small print when reviewing the Umbrella Company’s charges. Some companies will advertise their fees assuming you are a higher rate tax payer. If you earn less than £34,800 per annum, these won’t be the charges you pay!

ContractorUmbrella has a very competitive fee structure and everything is laid out in black and white in our fees page.

Cheap Starter Fees, Leading to Normal, Higher Fees Afterwards

Some Umbrella Companies will use such hooks as £X fees for the first x weeks or free fees for the first x weeks but is this really a good deal?

After the promotional period has ended, the fees will revert to the normal charges which are usually more expensive than the other companies.

All Umbrella Companies have to charge for their services; if fees are advertised as nothing, or next to nothing, the company will have to make their money another way e.g. by only paying you once a month even if they receive payment from your agency every week

IR35 compliant… it’s irrelevant!

The IR35 rules don’t apply to contractors operating through an Umbrella Company as your payments are processed through PAYE. Although the claim of ‘IR35 compliant’ sounds impressive, it’s completely pointless!

Act as ‘Employer’

According to new legislation Umbrella Companies must now act as employer to its contractors. An Umbrella Company that doesn’t operate a holiday pay policy could still leave you at risk of the MSC legislation. A contractor can be paid through the PAYE system but this alone isn’t necessarily enough to give you the status of employed. Without holiday pay you could still be held accountable under the MSC rules as a self employed individual.

A prominent, well respected industry lawyer has suggested that in the next budget, HMRC will want Umbrella Companies to take on all the associated employer responsibilities.

Agency Recommended

Some Umbrella Companies are known for paying referral fees in return for recruitment consultants sending their details onto new contractors.

Although there is nothing wrong with this in principle, it is increasingly becoming the case of who will pay the most for referrals, rather than passing on a company’s details because the consultant knows you will get good service from them.

It is also becoming more common that Umbrella Companies will form a contract with the agency, in exchange for referral fees, which locks them into passing on all their contractors solely onto that particular company. The contractor is given no choice; if they want a contract with certain agencies they will have to use the agency’s ‘preferred’ Umbrella Company, regardless of service levels or personal preference. This practise is restrictive and is rarely used to improve the contractor’s lot, more to line the agency’s pockets.

If after reading this page you have any questions or would just like to make a general enquiry, please contact a member of our team on 01206 713680 or email us at

Freelancers in the UK is delighted to be associated with an organisation which so obviously works on the side of freelance professionals everywhere. Anything to minimise the paperwork can’t be bad…

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