What are five pros and cons of an umbrella company?

Now Free-Work readers are au fait with what an umbrella company is; we can move to look at five pros and cons of working via an umbrella company, writes Shelley Ankers-Wainwright, founder of SAW Consulting.

Deciding whether to work through an umbrella company or a limited company can be confusing, but finding the right option is not just about what you want to do but it is also dependent upon your circumstances.

To brolly, or not to brolly? IR35/ OPW rules might leave you no choice

If your temporary technology assignment falls inside the scope of the IR35 legislation, for example, then working as an umbrella company contractor is going to be the best (and likely only) solution for you.

The disadvantages of working through an umbrella company are often well-publicised.

Five ‘cons’ of an umbrella company

Let’s take a look at some of these disadvantages of umbrella company working:

1. Tax-efficiency fail

The obvious negative of working through an umbrella company as an IT contractor is that it’s not as tax-efficient as working through a limited company.

You might get some umbrellas telling you that you can claim tax relief on travel to work expenses with no tax consequences. Be wary of these suggestions because in most cases, working through an umbrella you are likely to be acting under supervision, direction or control (SDC), and as a result, are unlikely to be able to claim for many, if any, expenses.

2. Less control

You have to give up a lot of control when you join an umbrella company, as you won’t be running your own company; you’ll simply use the umbrella as a service to process transactions, while someone else is in charge of all of your paperwork. While some contract technology professionals are perfectly fine with this relinquishing of autonomy, you may not be!

3. You’re entering the Wild West

The umbrella company market isn’t regulated and there is no clear definition of an umbrella company. Unfortunately, this means that there are lots of unscrupulous umbrellas out there which take advantage of vulnerable workers, and you may find yourself caught up in a tax avoidance or disguised remuneration scheme.

If you engage with a non-compliant payroll provider, you could find yourself with a large tax bill from HMRC. Do your research, look for accreditation, and ask for personal recommendations in a bid to steer yourself clear of anything other than a standard PAYE umbrella company -- where your take-home pay shouldn’t be significantly more than around 58%.

Positively (if entering an unregulated market bothers you), there is a consultation underway which proposes to regulate umbrella companies, but there is currently no timetable from the government to introduce the regulation, the design of which is also yet to be confirmed.

4. Complex payslips

Payslips appearing opaque to the average individual is unfortunately how money can go walkies without you noticing!

When you follow the flow of money through the payslip you may unfortunately find hidden deductions or lines that don’t add up, which indicates the umbrella may be potentially skimming cash from you – their very own workers! Ask for your payslip to be explained to you and if something doesn’t add up, question it.

5. Not (potentially) getting the pay advertised

The whole ‘Assignment Rate/ Umbrella Rate’ debate really takes the gloss of umbrellas!

To explain; some umbrella rates are advertised as a ‘contract/assignment rate’ before employment costs are deducted. Meaning, the rate you sometimes see advertised is not what you will receive as your take-home, because the umbrella will deduct the likes of Employer’s National Insurance, holiday pay, and your pension! Make sure you check the rate with the agency/ end-client and be clear about what the umbrella will receive versus what you will receive in your pocket.

With umbrella companies, it’s not all doom and gloom, however.

There are advantages to using an umbrella company, and I’m pleased to say there are still lots of good umbrellas operating in the UK in 2024.

Five ‘pros’ of an umbrella company

Here are five ‘pros’ to umbrella company working -- so the main advantages of using an umbrella:

1. It’s quick and pretty straightforward to get going

It’s easy to join and get paid via an umbrella company. There is very little administration on your part, as the worker. No tax returns, no accounts and providing they are compliant, no surprise tax bills!

2. Nice rights limited company contractors don’t get

You become an employee of the umbrella company and as an employee, you get statutory sick, maternity/paternity and holiday pay, plus enrolment onto a pension scheme. Some contractor umbrella companies also offer additional benefits like health insurance.

3. Continuous employment

Using an umbrella company allows you to work for multiple clients. You will have continuous employment which can potentially be helpful when it comes to securing mortgages and qualifying for other financial products.

4. Tie-in, what tie-in?!

When you register with an umbrella company, they will retain a margin each time you are paid. But positively, there will not be any joining or leaving fees which means you do have the flexibility to switch to a new umbrella company or move to a limited company if your circumstances change. So there’s no tie-in period -- pretty refreshing!

5. Perfect to just dip your toe in the waters of IT contracting

Umbrella companies are ideal for short-term contracts or if you are new to the world of tech contracting, and simply want to ‘dip your toe’ into the waters of working as a techie on a temporary basis. So brollies, despite their snags, remain a great way to start out or just to see if computer contracting is right for you. Good luck!