Umbrella companies remain a popular payroll provider for contractors and freelancers in the UK. However, how much do you know about umbrella companies, and are you aware of the pros and cons of using an umbrella company in 2023? Keep reading for more information.
Pros of using an umbrella company in 2023
Compliant payroll
Compliant umbrella companies will process your payroll in accordance with HMRC’s tax system, Pay As You Earn (PAYE). This means your payroll will be processed compliantly, and you will receive your net salary (with all deductions, including tax and NI made directly to HMRC by your umbrella).
Easy to join
Registering with an umbrella company is far easier than you might think, and the whole process can be completed in a little over 10 minutes. You’ll need to provide your umbrella with several pieces of personal information, including name, date of birth, address, bank details, NI number, assignment information, and more. It will also be necessary for you to provide proof of your identity and right to work in the UK (if you’re not a UK national). You’ll also be required to sign and return a Contract of Employment, but make sure you read it thoroughly and only sign it if you’re happy with all of the content.
Even easier to leave
Leaving an umbrella is very straightforward. All you need to do is contact them and let them know you’re leaving. Don’t forget to request a P45 – a document you’ll need to give to your new umbrella company if you’re switching payroll provider.
Low margin
The umbrella company marketplace is saturated, and there are over 500 providers to choose from. As a result, umbrellas are competing for business, and the prices of using them is relatively low as a consequence.
The only income that compliant umbrellas retain for themselves is the margin they deduct each time they process your payroll. Usually, a weekly umbrella margin will vary between £15 and £30, but there are some special offers out there if you keep your eyes open. Check out our top 10 umbrella companies because Umbrella Company UK (our number one umbrella) is running a special £10 per week promotion.
Ideal for temporary assignments
Umbrella companies are easy to join and leave as you please – making them ideal for short-term assignments. They are also very helpful for first-time contractors because you can get a taste of contracting without worrying about paying the correct tax and NI – because your umbrella will take care of this for you.
Added extras and Employee Benefits
Most umbrella companies will provide more than just a payroll service, including:
- Free insurance cover
- Same Day Faster Payments
- Employee Rights (a legal requirement, including Statutory Sick Pay and Maternity/Paternity Pay)
- Access to an employee discount scheme
- Salary sacrifice for pensions
- Referral rewards if you get your friends and colleagues to joint he same umbrella (such as repaid margins for a specific number of weeks)
Continuity of employment
Continuity of employment is frequently overlooked, but it’s one of, if not the biggest, advantage of using an umbrella company. You can use the same umbrella for multiple assignments, meaning you have the same employer (your umbrella) throughout. This gives you continuity of employment and can help you obtain finance such as a mortgage and bank loan.
No need to worry about IR35
Umbrella companies will pay you with HMRC’s tax system – Pay As You Earn (PAYE). Therefore, your IR35 status is irrelevant, and you will be contributing the correct tax and NI to HMRC (because you’ll be paid inside IR35 and very similar to an employee in a permanent position).
Cons of using an umbrella company in 2023
Lower take-home pay compared to assignments outside IR35 –
The most tax-efficient way for contractors and freelancers to operate is to be a limited company director and work on assignments outside IR35. By operating this way, you can pay yourself a combination of salary and dividends. Using an umbrella company means you’ll be paid as if you’re inside IR35 – with HMRC’s tax system Pay As You Earn (PAYE).
Lack of control over finances
Umbrella companies will receive your assignment rate from your agency/end-client, make the legal deductions and will then send your net salary to your personal bank account. Therefore, while the process is straightforward and hassle-free, you won’t have much control over your finances compared to being the director of a personal service company and working outside IR35.
Potential payment delays due to supply chain
When you use an umbrella, your funds are passed down the supply chain. For example, if you work for an end-client, they’ll send your funds to your recruitment agency (assuming you sourced the role via one), and the agency will then transfer your payment to the umbrella company. The umbrella makes the legal deductions and will then send your net salary to your personal bank account. Due to the passing of funds down the supply chain, it’s not uncommon for payments to be made late – and it’s not always the umbrella company to blame. For example, if the end-client is late paying the agency, it can delay the whole process.
There are unethical providers out there that you must avoid
Unfortunately, while a majority of umbrella companies are compliant, a few unethical payroll providers target contractors and freelancers. You must use a compliant umbrella and pay the correct tax and NI to HMRC, or you could face severe penalties.
To help you choose an umbrella you can trust, please read the following guides on our website:
- Tax avoidance schemes
- HMRC named and shamed tax avoidance schemes
- A quick guide to help contractors pick a compliant umbrella company in 2023
- The most common types of tax avoidance schemes
- HMRC hands out £1 million fine to promoter of tax avoidance scheme
- New government guidance designed to help employers and workers understand employment status and rights
To help you pick an umbrella company you can trust, we recommend you search for one with a professional accreditation from either the Freelancer and Contractor Services Association (FCSA) or Professional Passport. These two organisations are the most respected independent bodies that exist to ensure the supply chain of temporary workers is ethical and compliant with HMRC’s rules and regulations. Therefore, FCSA and Professional Passport members adhere to the highest standards.
Claiming expenses is unlikely because of Supervision, Direction and Control (SDC)
In 2016, the government introduced legislation known as Supervision, Direction and Control (SDC). Essentially, SDC makes it very difficult for umbrella employees to claim expenses. For more information on SDC, please visit our dedicated page: What is Supervision, Direction and Control?
Conclusion
There are plenty of pros and cons of using an umbrella company in 2023. Ultimately, umbrella companies are a good choice if you want to work inside IR35 and have your payroll taken care of compliantly. However, there are a lot of things to consider. Most importantly, it’s imperative you pick a compliant umbrella company because there are unethical organisations out there that are facilitating tax avoidance.
Top 10 umbrella companies
If you are interested in using an umbrella company for your next temporary assignment, or your current umbrella is providing a poor service, we have just the resource to help! Please visit our top 10 umbrella companies. They are all accredited by the Freelancer and Contractor Services Association (FCSA) or Professional Passport, and some have special offers at the moment that you won’t want to miss.
