Myth vs Reality: Debunking Common Misconceptions About Umbrella Companies

Myth vs Reality: Debunking Common Misconceptions About Umbrella Companies

Umbrella companies have been with us for around 20 years, and in that time they’ve helped millions of contractors, and thousands of recruitment agencies and end-clients get on with the business of work. Despite most people knowing what an umbrella company is and does, there are still some common misconceptions around how they go about providing their essential services. Here we look at some of them and help debunk some of the more persistent ones.

‘This umbrella company is HMRC approved’

Possibly the most dangerous misconception that recruitment agents can have, because no umbrella company is ‘approved’ by HMRC. And if they claim it is then this is a sure sign that the products they offer are non-compliant and can get you and your agency into serious trouble with the tax man. Compliance is vital to ensuring a healthy and productive working relationship with any umbrella company that you partner with and doing business with one that breaks the tax rules can lead to tax investigations, fines and reputational damage.

Only trust umbrella companies who are accredited by the likes of FCSA (Freelancer & Contractor Services Association) which strives to raise standards of compliance among umbrella companies.

They offer higher rates of take home pay than other umbrella companies – isn’t this better for my contractors?

A compliant umbrella company, operating within the tax laws of the UK, acts as a contractor’s employer. Therefore, that employee will be taxed at the same rate as a ‘traditionally-employed’ person and is required to make the same contributions. If contractors are unsure how much tax they have to pay, they can use HMRC’s Tax Calculator to give them an indication. And any umbrella company that offers more take-home pay than that should be avoided. Here at i4 we also offer a tool to help understand how much tax and NI they should expect to pay, so that they can compare it to non-compliant offerings, and make an informed decision. 

Contractors don’t get the same in-work benefits as other employees

All employees in the UK are entitled to certain mandatory benefits. These include Statutory Sick Pay, Maternity or Paternity Pay, Holiday Pay and the option to enrol in a workplace pension. These are fundamental rights to which every worker is entitled and contractors who work for an umbrella company are no different. 

Some, non-compliant, umbrella companies may try to avoid paying their contractors such benefits – we’ve covered the devious practice of retaining contractors’ holiday pay for example previously. However, a fully-compliant umbrella company will never attempt to retain any money from contractors that it is not entitled to and will abide by the spirit and the letter of the Agency Workers Regulations

Joining an umbrella company is complicated

Some umbrella companies seem to make life complicated for their contractors, with a registration process that involves onerous paperwork and an unseemly delay between registration and payment. If that’s the case with the umbrella companies you deal with you need to think again.

Registering with an umbrella company such as i4 couldn’t be easier. We’ve made every effort to simplify the process with our three-step Secure On-line Registration. In it we’ll ask contractors some basic details about themselves, as well as which recruitment agency they found their job with, and who their end-client is. Once we’ve received this information we’ll send them a confirmation email asking them for proof of their entitlement to work in the UK, as well as their address. On receipt of this we’ll then send them a Welcome on Board pack detailing their login credentials to our secure web portal, asking them to e-sign their contract of employment and assignment schedule. As soon as that is done they are officially employees of i4 and we’ll let you know so that your records are up-to-date and their assignment can begin.

There are many common misconceptions about umbrella companies, some of which we’ve dealt with here. The main point to remember is that any umbrella company that you partner with must be compliant, adhere to the law, and treat you like a real business partner. You can find out more about the benefits and services we offer recruitment agencies here and if you’d like more information about partnering with us you can call us on 0800 0084 3058, email us at or drop us a message here.