Umbrella Company FAQs

Am I self employed?

No. You are an employee of your umbrella company. And with that you get the safety net of sick pay, holiday pay and maternity/paternity pay.

There's also quite a few additional benefits with the umbrella company employment model.

Am I working inside or outside IR35?

All contractors that use an umbrella company service are deemed to be working within IR35. It's not something you need worry about.

Can I claim Holiday pay?

Like a permanent employee, contractors are also untitled to receive holiday pay as the umbrella company is deemed as the contractor's employer. The umbrella company withholds some of your pay which you then get given when you take a holiday.

Can I Claim Statutory Sick Pay?

As the umbrella company is deemed as your employer, you have the same rights as a permanent employee in this respect. The umbrella company is legally bound to pay statutory sick pay to you after four consecutive days absent from work.

Do I need to send my umbrella company my P45?

Yes! Send your umbrella company your P45 straight away. Without your P45 you will be paying emergency tax. This is not good - you will be taking home less money. As soon as you pick your umbrella company send them your original P45 (a copy will not do for this document).

If you do not have a P45, your umbrella company will send you a P46, which you will need to complete and return to them. HMRC will then tell them your tax code.

Does a contractor umbrella company pay dividends?

No. Dividends are not payable through a PAYE umbrella company solution.

HMRC Investigation?

Working through an umbrella company offers you no protection whatsoever from an HMRC investigation of your tax affairs.

If, for example, HMRC discover you have claimed expenses to which you were not entitled you will have to repay your tax underpayment and very likely a large fine.

Is VAT is payable on Umbrella Company fees?

VAT is a compulsory retail tax imposed centrally by the government. There are very few exclusions, and umbrella company fees are certainly not one of those. Every umbrella company has to charge VAT.

It's not all bad news, your umbrella company fee is an allowable cost which you can off-set against tax. Your umbrella company would normally do this calculation for you automatically.

Umbrella Company Dispensation?

A dispensation means that the umbrella company and HMRC have less paperwork to do. A dispensation allows a company (any company not just an umbrella company) not to report at year end every single detail that has gone on during the year. It also means HMRC do not have to check every single detail. It is in effect a cost saving exercise by HMRC, which also benefits an umbrella company.

If your contractor umbrella company has a dispensation (most do) it benefits them - not you. You still have to keep all your receipts, otherwise you will fall foul of HMRC's rules. A dispensation does not state what you can or cannot claim. If you want to claim a business expense you can as long as it was "wholly and exclusively incurred in the performance of the contract."

What about my VAT, PAYE, and NI tax bills?

Working through an umbrella company, you do not need to worry about any of these things. Your umbrella company takes care of all your VAT, PAYE & National Insurance responsibilities on your behalf. Income tax & NI are deducted and paid to HMRC by your umbrella company. You do not need to do a thing.

What are Bacs and Chaps payments?

‘BACS' and ‘CHAPS' are standard banking payment terms.

• ‘BACS' is the standard payment. When the umbrella company pays you it will take three working days to reach your bank account, and this does not cost you anything.
• ‘CHAPS' payment, is a same day payment. Once the contractor umbrella company has run your payment, this will reach your account the same day, you will have to pay for this service, but some umbrella companies have this payment method as standard and include CHAPs in their fee (though it is usually more expensive).

What do I do when my Contract ends?

Your umbrella company should support you in finding your next contract; you should expect to have a long-term relationship with your contractor umbrella company that will cover a number of contracts over a number of years.

If you decide to leave your umbrella company they will send you your P45 which you will need to give to your next employer.

What is an MSC?

A Managed Service Company (or Composite Company), provides services of individuals to other persons. The contractor is placed in a limited company and made a director of that company along with other individuals; they are then paid in shares and dividends.

In the chancellor's pre-Budget announcement of 6th December 2006 he removed the tax advantages that composite and managed service companies could offer their clients.
Managed Service Companies are now a thing of the past.

What is an Overarching Contract?

You are a professional contractor and you intend to seek a succession of assignments through your contractor umbrella company. Your contractor umbrella company's contract of employment is an over-arching contract and enables you to establish your permanent work place at your home. You will use your home office to:

• Find new contracts
• Undertake skills training
• Use as a base to travel to your temporary assignments
• Complete the paperwork for your current assignment

Your assignments therefore take place at temporary workplaces. Why is this important? Because

1. You can claim an allowance for use of your ‘home as office' - which is free of tax
2. You can claim an allowance for business travel to a temporary workplace.

What is the 24 month rule?

This rule states that the cost of travel from your home (being your permanent place of residence) to your contract site address (your temporary workplace) is only allowable as a tax deductible expense for as long as you believe your contract will not exceed 24 months.

If you know your contract will be longer than 24 months, you should not claim travel expenses. Once your contract has exceeded 24 months (which you were unaware previously that it would do) you are now deemed as a permanent employee and therefore unable to claim travel expenses.

Will my Umbrella Company pay my Expenses?

No. However, your umbrella company will refund to you all business expenses actually incurred by you in the performance of your contract.

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 1. What is contracting and how can I become a contractor?
 2. You've got the contract, what now?
 3. What is an umbrella company?
 4. Umbrella company myths
 5. Umbrella company FAQs
 6. Umbrella company paperwork
 7. Umbrella company expenses
 8. Calling an umbrella company
 9. 10 questions to ask your umbrella company
10. IR35
11. Paying Employer's National Insurance
12. Choosing an umbrella company
13. Umbrella company alternatives