What are the disadvantages of using an umbrella company?

It is important to consider the disadvantages of using an umbrella company before you register. However, while there are a few disadvantages, there are also many benefits that can often outweigh the negatives. Continue reading to discover the advantages and disadvantages of using an umbrella company.

What are the disadvantages of using an umbrella company?

Before registering, you should consider some disadvantages of using an umbrella company.

Not as tax-efficient as limited companies

If you are deemed outside of IR35 and can operate via your own limited company, you can pay yourself tax-efficiently with a combination of salary and dividends. In contrast, using an umbrella company for your payroll is less tax-efficient than a limited company, as you are paid via PAYE.

What is PAYE?

Pay As You Earn (PAYE) is an HMRC system for collecting Income Tax and National Insurance from employees. It is collected when your employer (your umbrella company) runs payroll and is paid directly to HMRC.

You cannot claim expenses

Since the introduction of Supervision, Direction and Control (SDC) legislation in 2016, most umbrella company employees can no longer claim tax relief on travel and subsistence expenses.

Reliant on your client and recruitment agency to be paid on time

Unfortunately, when you get paid by an umbrella company, they are not the first in the supply chain. The end client or recruitment agency will transfer the funds for your assignment to the umbrella company. Once the umbrella company has received the funds, they will process your payment and make the required tax deductions before paying you. While umbrella companies will do everything they can to ensure you are paid on time – if there is a delay in the umbrella company receiving the funds from the agency or end client, that will cause a delay in the umbrella company being able to process your payroll and pay you.

Be careful of tax avoidance schemes

Sadly, some unscrupulous companies are posing as compliant umbrella companies when, in fact, they are actually tax-avoidance schemes. While this is not true of all umbrella companies, it’s sad that they are tainting the reputation of compliant providers. Why not check out our useful guide to discover how to spot a tax avoidance scheme and what to do if you think you may be using one?

Are there any advantages of using an umbrella company?

Although there are some disadvantages of using an umbrella company, there are also plenty of benefits.

Inside IR35

An umbrella company is the perfect way to get paid for contracts inside IR35. You’ll be taxed at source (PAYE), just like a permanent employee, and therefore comply with IR35 legislation (provided you use a compliant umbrella company).

There is no tie-in period

You can use an umbrella company for as little or as long as your inside IR35 assignments last. And they will only retain a margin for the weeks you work.

Compliance with UK tax law

As your payroll is processed via PAYE, compliant umbrella companies will make the appropriate tax deductions and pay them to HMRC.

£25 million insurance cover

As standard, most compliant umbrella companies will provide free insurance cover (Employer’s Liability Insurance, Public Liability Insurance and Professional Indemnity Insurance) as part of the service.

Minimal administration

Once registered, there is very little ongoing administration; you only need to submit a timesheet to your agency/end client and your umbrella company (if required).

Continuity of employment

You can work for multiple clients at the same time or consecutively, and your umbrella company remains your sole employer. Continuity of employment is helpful when obtaining a mortgage or loan.

Employee benefits

You’ll have access to employee benefits such as Sick Pay and Maternity/Paternity Pay.

Low cost

Umbrella company margins are considerably more affordable than a contractor accountant’s fees.

Arrange a call to discuss the benefits of using an umbrella company

Many benefits far outweigh the disadvantages of using an umbrella company for your payroll. When you register with Churchill Knight Umbrella, you can benefit from free insurance cover (worth £25 million), Same Day Faster Payments, a dedicated Onboard and Customer Service team to help you every step of the way, our state-of-the-art app and portal employee benefits, Churchill Knight Rewards and a salary sacrifice service (if required). We are also an FCSA-accredited and SafeRec-certified umbrella company, so you can get paid with complete peace of mind that your payroll will be processed compliantly and per UK tax law.

For a free, tailored take-home pay calculation, please call our Sales Consultants on 01707 871622. Alternatively, please complete the short form on this page to schedule a call for a time that suits you to discuss the benefits of using an umbrella company.