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What are the disadvantages of using an umbrella company?

Thousands of contractors opt to work through an umbrella company in the UK. So why has this become such a popular option for contractors?


If you are a contractor and are considering your options, you will want to know the benefits of operating through an umbrella company, as well as the disadvantages to this route.


Let's dig in.


What is an umbrella company?


One way that contractors can choose to work is through an umbrella company. The umbrella company acts as a third party between the contractor and client, taking care of the financial and administrative side of contracting.


This means that it is the umbrella company that will invoice the client on behalf of the contractor, and chase any late payments where necessary.


The umbrella company employs the contractor, in turn paying them a salary. When their salary is paid to them, it will be processed through the umbrella company’s payroll, meaning that tax and National Insurance are deducted in line with current pay-as-you-earn tax bands.


The umbrella company will also take care of administrative tasks such as processing expenses, invoicing and any other paperwork.


That’s how an umbrella company works, but what are the disadvantages of this route?


Disadvantages of using an umbrella company


Tax efficiency


As we will go on to explore, there are a vast range of advantages to operating through an umbrella company. So what’s the catch?


Thankfully, there aren’t many drawbacks to this route.


One of the only disadvantages to an umbrella company is that they can sometimes be less tax efficient than if you set up your own limited company and paid yourself through a mixture of salary and dividend payments.


This is due to the fact that when you work through an umbrella company you will be paid a regular salary and pay your tax through PAYE, the most common way to pay tax in the UK.


Contractors that set up their own limited company, on the other hand, are able to pay themselves in a more tax efficient way by paying themselves a low salary each month, and then topping this up with dividend payments which are subject to slightly lower tax bands than income tax.


Although this might save you a few pounds over the year, it is important to note that running a limited company comes with a set of duties and responsibilities which you can find here. 


What’s more, as a company director you will need to file annual company accounts, a corporation tax return and usually a self assessment. These can all be complex and usually require you to hire the services of an accountant which comes at an additional cost. What’s more, you will need to pay corporation tax on any company profits, and VAT if you go over the turnover threshold.


So, although it might appear tempting to see this option as more tax efficient, it does come at extra costs and brings many more responsibilities with it.



What is an umbrella company?

Advantages of an umbrella company



Take care of tax


Working through a limited company means a lot of responsibility when it comes to taxes and finances.


When you work through an umbrella company, on the other hand, taxes and finances are taken care of.


When the umbrella company processes your pay through their payroll, they deduct the correct amounts of tax and National Insurance from your pay, meaning you are always up to date and compliant with your tax affairs.


 This takes a weight off your shoulders and means you can focus on what matters.


Statutory benefits


Another benefit when working through an umbrella company is that it means you will be eligible for statutory rights. This means you will receive a minimum of 5.6 weeks of paid holiday leave, will receive sick pay if you’re too ill to work, and will be entitled to maternity/paternity leave.


This provides a great security net for contractors, meaning you can rest assured that you’ll still be paid if you need to take time off. The same cannot be said for limited company contractors, who will not be paid if they don’t work.


Forget about IR35


Contractors will be pleased to learn that when you decide to work through an umbrella company, IR35 becomes a thing of the past.


As the umbrella company acts as the contractor’s employer, they are exempt from IR35, meaning no stress, hassle or worrying whether you’re inside or outside of the legislation.


Insurance covered


The umbrella company will ensure that the contractor is covered when it comes to insurance. After all, contractors are legally obliged to have certain types of insurance such as public liability insurance, and may need additional cover depending on the contract at hand.


Thankfully, the umbrella company will take care of this, meaning one less task to worry about.



Ready to engage the services of an umbrella company?


Now that you know about the many benefits of working through an umbrella company, you might want to take the next steps. That's where Umbrella Search can help.


When choosing an umbrella company, it's important to find the right one. After all, every contractor is different, and so you need to find an umbrella company that suits your needs. This can take time, energy and many hours, which is why many contractors pass on this task to Umbrella Search.


We will take on the hard work for you, carrying out thorough research and due diligence in order to find an umbrella company that’s the best fit for you.


To see how we can help, and take the first steps to finding the best umbrella company out there, simply get in touch with the Umbrella Search team today.  


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