5 Biggest umbrella myths (can you believe number 2!?)
For years, I have visited recruitment agencies across the UK. Meeting with a range of contacts from all levels. The Junior resourcers of the world. The senior consultants, those in operations. All the way up to MD’s and directors.?
I’ve shared insight on IR35, AWR, and general day to day advice on how to manage a contractor workforce and getting them paid efficiently, and compliantly.
One thing I have learned is that there is that there are a number of umbrella myths that are perpetuated and have stuck.
To mark the start of my linkedin journey (either becoming an informative umbrella voice, or another individual droning on to an audience of only their colleagues) here are my top five umbrella myths.
1. “X umbrella offers better home pay”
In 2016 a new piece of legislation was introduced called supervision, direction and control (SDC). The test was designed to differentiate contractors that were genuinely self-employed, and those that were acting more like full-time employees, specifically regarding the expenses they can claim.
Before this legislation was introduced, umbrella employees had the ability to utilise expenses as a way of reducing their tax burden, and ultimately increasing their take home pay.
The grey area around the rules, meant that umbrellas were able to offer claims such as “maximise your take home pay”, and thus this became a selling point.
Now, six years on from those changes, those abilities are heavily restricted.
Realistically, the only difference between a contractors take home pay when comparing umbrellas should be the umbrella margin. Afterall, the other deductions – Employers NIC, App Levy, Pension, NIC, Employee NIC and Employee PAYE tax – are standardized, and the same across the board.
Generally speaking, a large difference in take home pay should be treated with caution. And the question should be “why?”. The most likely answer is that is smoke and mirrors.
2. “All umbrella’s are the same”
There is some truth in this point, but also it is completely untrue.
Payroll as a function is black and white. You either pay someone, or you don’t. You either pay them correctly, or you don’t.
So at the core, yes – all umbrella companies do the same thing.
However, payroll isn’t as straightforward as just paying people. There are a range of challenges that require intricate processes to ensure the process runs smoothly and correctly. Visibility is needed at every step of the way, to ensure communication is fast and accurate, to all interested parties.
It is not a point A to point B journey. The middle part of the journey throws up questions such as – “Am I getting paid today?”, “What am I getting paid?” etc.
Without visibility, systems, and processes, these questions cannot be answered.
That’s just payroll. There are so many other aspects that require expert management - Onboarding; Expenses; Customer support; Timesheet submission; To name just a few.
These factors will make or break a contractors journey, and settle or destabilise an agencies contractor happiness. Reflecting well, or poorly, on them.
The truth is, umbrella companies are wildly different. How they approach their service, and their strategy towards managing the contractor journey varies from place to place.
There is good, there is bad, and then there is ugly. But they are not the same.
3. “ My contractors just want the cheapest umbrella”
Now, it almost feels like this doesn’t need an answer. Common sense would say that Ferrari wouldn’t exist if everyone wanted the cheapest car. The streets would be filled entirely with Ford.
领英推荐
Some contractors make their decisions based on price alone. However, a lot more are interested in other factors personal to them.
A parent of two, for example, might be extremely interested in an employee benefits package that offers something like “kids go free cinema tickets” and “cashback at all major supermarkets”. I am not a parent, but it doesn’t take a genius to work out that those kind of savings can make a serious difference to the money left in a parents pocket.
On the other hand, a mature contractor in their 60’s might be thinking about the end game ?(Retirement not death FYI). They want the flexibility to contribute to a private pension. Their own private pension - one that already exists – and therefore make their decisions on who can support them achieve that.
And on a more simple level, contractors want peace of mind that their chosen umbrella will pay them correctly on time. That they will be on the other end of the phone, or live chat, when they need them.
Assuming all contractors want the cheapest price, removes their ability to make informed choices based on their personal circumstances.
4. “There is no difference between agency PAYE and umbrella”
As with myth number 2, there is some truth in this. Again, payroll as a function is black and white. In that respect, PAYE and umbrella are the same.
It’s when you look at other factors that the differences become more apparent.
Here are some, but not all, of the benefits a contractor receives when choosing umbrella over PAYE
Horses for courses. Different strokes for different folks. PAYE might be the better option for some individuals, however for the vast majority, umbrella offers tangible and important benefits.
5. “The contractor pays National Insurance twice with umbrella”
I’ve decided to explain this one in the most simple language possible for a linkedin audience.
All employers in the UK are legally required to pay employers national insurance on the salaries of their employees. Full-time employees do not see this happening. This is calculated and paid behind the scenes. Some will not even know this exists.
As the umbrella becomes the employer, the rules are in no ways different. They are required to pay this contribution. ?
The contract chain operates in this way - contractor carries out work for the agencies client, not directly for the umbrella – therefore the funds that cover the deduction needs to come from somewhere other than the umbrella.
Think of it this way – if the umbrella is charging a margin of ￡20 per week, and the employers national insurance liability for that week is ￡57, there is a mathematical problem. Umbrella’s would be loss making business, and not one would survive.
It is then imperative that contractors, and agencies alike, understand the difference between the assignment rate and gross pay. It is vital that the umbrella explains this so that contractors understand that the ENIC is not being deducted from their pay. Which would be illegal.
The initial funds that an umbrella receives (assignment rate X days/hours worked) is the figure with which the initial employment deductions will be made.
It is then after that point, where the employee’s gross pay will be calculated.
The difference is that the deductions are not deducted from pay. They are deducted from the assignment rate. Which has been uplifted by the agency or hirer, to cover these costs.
For transparency, all deductions from the assignment rate should be itemised and produced to the contractor. Allowing them to see exactly what has happened since the AR is received by the umbrella.
If a contractor believes that they have paid National Insurance twice, they are simply unaware of how the umbrella model works. Perhaps this wasn’t explained to them properly, or perhaps they have never used an umbrella company before.
These were top 5 #umbrellacompany myths. If you have a myth that is not featured please share.