There is a wide range of reasons why contractors choose to work with an umbrella company. For a fee, contractors can have the administrative burden of running a business lifted, financial protection in the form of statutory payments, compliance with regulations such as the IR35, and more.
While there are considerable benefits to umbrella companies, they carry with them some downsides that might not make them for everyone. Continue for a breakdown of the advantages and disadvantages of using an umbrella company.
What is an umbrella company?
Simply put, an umbrella company is a company that hires contractors and freelancers as employees. They offer to take care of the administration that comes with running a business, offer certain perks afforded to salaried employees, and provide a more accessible path of getting started with contracting. They expect a part of your earnings for these services, either in the form of a fixed payment every week or month, or a percentage.
Working with an umbrella company can be a beneficial solution for contractors that need a little help in certain areas, though it might not be a good match for others. As with everything in the contracting world, it is essential to do your own research to ensure you make the right choice for your situation.
Advantages of umbrella companies
One of the main draws to umbrella companies is the administrative support they offer, leading to the contracting without the hassle reputation they have. By working with an umbrella company, you will have your payroll, invoicing, and other admin handled on your behalf, allowing you to spend that time elsewhere.
Umbrella companies will also handle attending to your financial obligations, such as paying taxes or meetings with accountants. As your taxes come straight out of your earnings before they are paid, you won’t have to worry about keeping money to one side for the HMRC.
From the perspective of the law and the Treasury, you will be seen as an employee of the umbrella company you choose to work with. This means you will be entitled to the same statutory payments afforded to salaried employees, such as holiday pay, sick pay, and maternity/paternity leave. Additionally, as the umbrella company employs you, you won’t need to worry about IR35, as well as other laws and regulations regarding self-employment.
For people hesitant to fully make the change to contracting, working with an umbrella company provides a low-risk way of giving contracting a try without fully committing. It’s easy to get started, and you can always form a company if you decide you like how things are going.
Disadvantages of umbrella companies
There are a few downsides of note when deciding whether to contract via an umbrella company, with one of the leading disadvantages being tax efficiency. The tax benefits when working with an umbrella company are notably weaker in comparison to a limited company. This is mainly due to your earnings being solely in the form of a salary, as umbrella companies deduct PAYE, National Insurance Contributions, and their own fees from your earnings before paying you. By receiving both a salary and dividends, working as a Director of a limited company can be better from a tax perspective. It’s useful to look at Umbrella vs. PAYE and what’s most cost-effective for contractors.
A second significant disadvantage to consider is control. While it is true that a major advantage of working with an umbrella company is that they handle the administration, the cost is losing control over said administration. For contractors that prefer being directly involved in their finances and paperwork, this could be a dealbreaker.
Following the lack of control over your finances, you also have little control over when you get paid. In the vast majority of circumstances, compliant umbrella companies will ensure you are paid on time, however, the chain between you and your pay can be quite long. There is a risk that somewhere along that line something could go wrong, which may not always be due to your umbrella company’s mistake.
Claiming back expenses used to be much easier, and a big reason why contractors would choose an umbrella company over the alternatives. While you can still claim back expenses that directly result from your work, recent regulations, like the 2016 Finance Bill, have restricted much of what you can claim. This is because umbrella company employees could claim expenses that salaried employees could not, resulting in this legislation. Additionally, there are some shady umbrella companies that use making money by claiming expenses as a means to get people to sign up. This is not true and serves as a reminder to make sure any umbrella company you intend to work with is accredited and above-board.
Hopefully, this article provides enough information for you to make the best decision for you. However, if you still have questions or if anything is unclear, consider contacting an FCSA approved umbrella company for their professional advice.