What are the disadvantages of using an umbrella company?

Before this article, we wrote a short piece about the advantages of using umbrella companies. Now, we wanted to look at the other side and write another blog – this time focusing on the disadvantages of using an umbrella company. Keep reading to find out more.

Not the most tax-efficient solution

Using an umbrella company isn’t the most tax-efficient payroll option for contractors, freelancers and temporary workers. The best way to legally maximise your pay is to work through a personal service company (PSC) outside IR35.

PAYE

Umbrella companies will pay you in accordance with HMRC’s tax system – Pay as you Earn (PAYE). Therefore, you’ll be required to pay tax and National Insurance Contributions (NIC) just like a permanent staff member. This may well take some of the shine out of being a temporary worker.

Employment costs

Employment costs are often debated because they can be an area of confusion. The employments costs are the Employer’s NIC and the Apprenticeship Levy. When you use an umbrella, the umbrella cannot afford to cover these costs because the only income they generate is from the margin they retain for their service. Therefore, employment costs are required to come from the assignment rate – the rate of pay the contractor agrees for working on an assignment with an umbrella as their payroll provider.

Lack of control over personal finances

Umbrella employees do not have much control over their finances, and many contractors will see this as a significant disadvantage. For example, you’ll receive your net salary for the work you’ve conducted, and all deductions (PAYE) will have been made on your behalf (to the gross amount received by the umbrella from the agency/end-client).

Employee Benefits may not be as good as what permanent workers get

If you use an umbrella, you legally become their employee, which means you’ll get access to Statutory Benefits. These are certainly a perk to using an umbrella. However, many workers in full-time employment will get access to more than just the basic statutory benefits – depending on who they’re working for (for example, some companies include comprehensive employee welfare pages, etc.)

Where there is a chain – there could be delays

Once you’ve registered with an umbrella company, all you need to do to get paid is submit timesheets. However, you need to hope that your end-client and the agency you’re working with (if there is an agency) are efficient and process your payments on time. In many cases, some umbrella employees are paid late – and it’s not even the umbrella company’s fault (because they haven’t received your funds on time down the chain).

Tax avoidance schemes and non-compliant providers

Unfortunately, there are evil tax avoidance schemes and disguised remunerations schemes in operation, and they’re targeting honest, hard-working contractors. If you engage with one of these non-compliant payroll providers, you could be severely punished by HMRC.

Whatever you do, make sure you only use a compliant umbrella company for your payroll. Use a compliant umbrella company, and you will have nothing to worry about. We recommend you use one that the FCSA or Professional Passport accredits. Always carry out thorough due diligence.

You’ll almost certainly be unable to claim tax relief on expenses

Since the government introduced SDC legislation in 2016, most umbrella company employees cannot claim tax relief on travel and subsistence expenses. In fact, so few were able to prove they were not subjected to SDC that almost every umbrella in the UK doesn’t process expenses anymore.

Umbrella companies have advantages too!

Please check out our article: What are the benefits of using an umbrella company?

You’ll soon discover that there are plenty of advantages of using umbrella companies. Ultimately, like most things in life, there are pros and cons. We recommend you do your own research, but please, don’t believe all of the bad press that umbrella companies receive.

Top 10 umbrella companies

We’ve put together a list of the top 10 umbrella companies, and we think you’ll find it really handy. Whether you’re looking for an umbrella company for the first time or you’re interested in switching to a better provider, our top 10 list can help. Also, some of our top 10 umbrella companies have special offers at the moment. Check them out!

The Complete Umbrella Company Guide - Download Now

Click here to see our top 10 umbrella companies!

Free Telephone Advice
Scroll to Top