There are plenty of advantages to becoming an umbrella company employee, but it’s important to weigh those advantages against any potential drawbacks. Our latest article discusses the disadvantages or becoming an umbrella company employee.
Not as tax-efficient as forming a limited company
The tax advantages of limited companies are not available when payments are made through an umbrella company. While an umbrella company will take PAYE and National Insurance from your wages as required by law, a limited company director may choose to pay themselves a combination of salary and dividends. The majority of umbrella workers should anticipate keeping between 50% and 70% of their income, however contractors working through limited companies will probably keep more.
Limited financial control
You don’t have much control over your finances when you become an employee of an umbrella company since they will deduct everything before paying you. In contrast to directors of limited companies, there aren’t many chances for tax planning.
All income is liable to PAYE
You can decide how you will pay yourself as a director of a limited company; typically, this will involve a mix of salary and dividends. Umbrella firms, however, will pay you through the Pay As You Earn (PAYE) tax system administered by HMRC. You will be expected to pay Income Tax and National Insurance, just like permanent workers, and these amounts will be subtracted before any net payment is made to your personal bank account.
Restricted ability to deduct business costs
In the past, contractors who used umbrella businesses were able to claim expenses. However, the majority of contractors and freelancers hired through intermediaries and inside IR35 are no longer eligible to claim tax relief on travel and subsistence expenditures due to the implementation of supervision, direction, and control (SDC) in 2016.
Dependency on outside parties for timely payment
Apart from sending a timesheet to your agency or umbrella company (if necessary), once you’ve enrolled with an umbrella company, you won’t be doing much administration work at all because everything is done behind the scenes. Unfortunately, there is a chance that there might occasionally be a delay in payment, even though all complying umbrella firms will make every effort to ensure that you are paid on schedule. Until the umbrella firm receives money from your recruitment agency or end client, they cannot process your payment. Regretfully, there will be a delay in your payment if your agency or end client fails to transfer the money to the umbrella firm on time.
Tax evasion tactics and noncompliant suppliers
An enormous number of non-compliant umbrella companies operate tax avoidance schemes to lower their tax responsibilities and the tax responsibilities of the contractors using them. Despite their apparent legitimacy, they are not operating compliantly and using them could get you in serious trouble with HMRC and you will end up owing a lot of money in unpaid tax.
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