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.
PAYE
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.
Conclusion
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.
Also, if you wish to explore the job market, there are various freelance opportunities in London and the UK, and platforms like Jooble can help.
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.
