The Advantages and Disadvantages of Using an Umbrella Company
Most decisions that we make on matters involving money tend to have advantages and disadvantages. Using an umbrella company for your payroll is no different! There are many reasons why contractors and freelancers like using umbrella companies for their payroll. However, there are also some reasons why others prefer to avoid umbrella companies.
Please keep reading to find out more about the advantages and disadvantages of using an umbrella company for your payroll.
The advantages (pros) of using an umbrella company
We’ve summarised some of the main reasons contractors and freelancers decide to use an umbrella company for their payroll.
Compliance with UK tax law and HMRC regulations
Providing you choose a compliance umbrella company; you’ll be paid in accordance with UK tax law and HMRC regulations. This means you won’t face any risk of an investigation into your finances in the future. We must stress the importance of using a compliant umbrella company. Please do not be tempted to use a tax avoidance scheme. We highly recommend you only choose an FCSA accredited umbrella company.
No tie in period
When you register with an umbrella company, they’ll deduct their margin each time they process your payroll. Therefore, there should never be any joining or leaving fees, and you’re free to use the umbrella company as and when you require. For example, if you needed an umbrella company for one week every four months, you’re free to use them and leave them as you please! And, doing so should be easy.
Running a limited company comes with several important responsibilities, and regardless of which contractor accountancy you use, you’ll have some administrative duties. When you use an umbrella company – all you need to do is complete timesheets and get them signed and send to the relevant personnel. It’s really easy!
Registering with an umbrella company is not a stressful experience. Initially, you’ll be required to provide personal information, such as your date of birth, address, National Insurance number, assignment details etc. This is a legal requirement. Most umbrella users can complete the sign-up process in little over 10 minutes and once you’ve completed it once – you’re set!
Oh, and one more thing that’s worth adding – you’ll need to provide proof of your identity and your right to work in the United Kingdom. This is also a legal requirement.
When you join an umbrella company, they become your employer, which makes you their employee. As an employee, you’ll get access to Employee Benefits, including Statutory Sick Pay and Maternity/Paternity Pay.
Continuity of Employment
Using an umbrella company allows you to work for multiple clients – as and when you please. However, because you use an umbrella company, you’ll benefit from Continuity of Employment because the umbrella will remain your sole employer. This helps contractors secure mortgages and to benefit from other financial services. It’s one of the major perks of working with an umbrella company.
To grab your attention and to win your business, umbrella companies offer their clients a load of extras – at no additional cost! Keep and eye out and see what’s on offer. Our top 10 umbrella companies have some brilliants offers on at the moment.
In exchange for using their service, umbrella companies will deduct a margin from your gross pay (which means it’s taken before tax – costing you a little less). Most umbrellas will have a margin between £15 and £30 – which is significantly less than a majority of contractor accountants if you were operating through a personal service company.
We recommend you compare a small handful of FCSA accredited umbrella companies and see which one grabs your attention. Also, have a read of our blog ‘£30 a week for an umbrella company margin? No thanks!’ for more information on umbrella company margins.
Your IR35 status is irrelevant
If you’re using an umbrella company, your IR35 status is irrelevant because you’ll be taxed like a permanent employee (PAYE). That’s one less thing to worry about!
In reality, if you want to take an assignment that has been deemed inside IR35, using an umbrella company is probably the easiest option for your payroll.
The disadvantages (cons) of using an umbrella company
Below is a list of some of the most common reasons some contractors and freelancers are reluctant to use an umbrella company for their payroll.
Not tax efficient compared to being the Director of a limited company
This is no secret – being paid via an umbrella company is not as tax efficient as being paid a combination of salary and dividends through a limited company. Most umbrella company employees will retain between 60% and 70% of their pay. However, contractors operating through a limited company (outside IR35) are likely to retain more.
Traditionally, PAYE has always been associated with workers in permeant employment. Therefore, it’s not an attractive option for contractors because of the tax and National Insurance Contributions that are in place.
Minimal control of your finances
You don’t have much control over your finances when you use an umbrella company because they’ll pay you your salary after all the deductions have been made on your behalf. While it’s straightforward and stress-free, many contractors like having a more “hands-on” approach.
Employee Benefits might not be as attractive as others working in permanent employment
When you work through an umbrella company, you’ll have access to Statutory Employee Benefits – which is definitely better than nothing! However, some organisations with permanent staff offer much better benefits, such as full sick pay for more extended periods of time, annual leave, and little extra incentives. We’ve seen some companies actively promote a “Friday Beer Fridge” – this sounds too good to be true!
Reliant on your client, recruitment agency and umbrella to be paid on time
Being paid by an umbrella company involves very little input from you (just the submission of timesheets). However, when you think about it – the supply chain is pretty big. Therefore, while a majority of compliant umbrellas will ensure you’re paid on time, every time – there is a risk that things may go wrong from time to time – and it may not be your umbrellas fault.
Some are unethical and sneaky
Unfortunately, some umbrella companies try to mislead their clients by offering inflated take home pay calculations. If you’re new to umbrella companies and one is telling you you’ll retain more of your money with them compared to the rest of the providers in the marketplace – it’s no surprise if you’re tempted.
The only income that umbrellas make for their payroll service is the margin they deduct. Therefore, the margin is the only thing that will alter your genuine take home pay between compliant umbrella companies. Don’t get fooled into thinking one umbrella will ensure you’re paid more than another – they’re almost certainly being dishonest. Remember, all compliant umbrella companies will process your payroll in exactly the same way – PAYE. This is why the margin is the only thing that’ll impact what you earn retain month.
99.9% of umbrella employees are not entitled to claim expenses
Since the introduction of supervision, direction and control (2016), hardly any contractors who use an umbrella company are able to claim travel and subsistence expenses any more. Basically, HMRC noticed that umbrella employees were claiming expenses that permanent employees were not able to, and as a result, introduced legislation to stop this from happening.
Claiming expenses used to be a real incentive for contractors using an umbrella company. However, if you’re subjected to supervision, direction or control during your assignments, you’ll not be able to claim any expenses. Unsurprisingly, many umbrella companies no longer offer expenses as part of their service. Having conducted questionnaires to assess contractors’ SDC statuses – everyone was found to be subjected to it.
Hopefully the information above has helped explain the advantages and disadvantages of using an umbrella company. If you still have some unanswered questions, we recommend you contact an FCSA accredited umbrella company and ask their professionals for advice and guidance. And don’t forget to visit our page that provides a step by step umbrella company example.
Are you looking for more information about umbrella companies, including the advantages and disadvantages of using an umbrella company? Please take a look at the pages throughout our website. And, we highly recommend you check out our umbrella company FAQs. If you’d like to get a free, no-obligation take home pay calculation from a top 10 umbrella company, please request a quote now.