Like with everything, there are both pros and cons to using an umbrella company for contractors.
Therefore, it’s important that every contractor looks at both the advantages and disadvantages of using an umbrella company, so you can weigh up whether this is the best option for you.
To make things easier, Umbrella Broker has put together this guide on the pros and cons to using an umbrella company in 2021.
Pros of using an Umbrella Company
First, we will start by looking at the pros of using an umbrella company:
Take advantage of easy, hassle-free contracting
The first benefit to working with an umbrella company is that they make contracting easy and hassle-free for the contractor.
This is because the umbrella company takes care of the business and financial side of contracting. This means that the contractor needs only focus on the project they are working on.
For example, limited company contractors have to set up and operate a limited company. Here, they must take care of all paperwork and admin required, take care of the businesses’ finances including invoicing the client, collecting the fee, setting aside enough for tax and National Insurance, and paying tax through self-assessment.
An umbrella company, on the other hand, will take care of all these tasks on the contractor’s behalf, making contracting stress-free and easy.
No need to worry about self-assessment
Another advantage to working through an umbrella company is that the contractor’s tax affairs are taken care of.
As we have mentioned, unlike a limited company contractor that must file for self-assessment, which can be tricky and take up a lot of time, an umbrella company takes care of tax for the contractor.
The umbrella company employs the contractor and therefore puts them on their payroll. This means that when the company collects the contractor’s fee from the client, they process the amount through the PAYE system to ensure that the contractor pays the correct levels of tax and National Insurance and is always up to date with the tax they owe.
This takes a lot of stress and worry away from the contractor who therefore doesn’t have to worry about sorting out their own tax affairs.
Expenses are taken care of
Another plus to operating through an umbrella company is that they take care of the contractor’s expenses.
After all, contractors are able to claim tax relief on legitimate business expenses they incur on the job. Whereas limited company contractors have to record and claim these back themselves, umbrella company contractors can simply input these to their provider who will take care of the rest.
Enjoy statutory payments
Umbrella company contractors also benefit from qualifying for statutory benefits.
These include paid holiday leave, sick leave, maternity and paternity leave as well as a workplace pension.
This is because the contractor is employed by the umbrella company and therefore qualifies for the same statutory payments enjoyed by all UK employees.
Limited company contractors, on the other hand, do not receive such benefits, and therefore should they wish to take a holiday, or if they fall ill and cannot work, they will not be paid for their time.
For this reason, this is considered one of the biggest benefits of operating through an umbrella company for contractors.
Be exempt from IR35
A contractor operating through an umbrella company also enjoys exemption from IR35. This means they don’t have the hassle and worry that limited company contractors do about getting caught out by the infamous legislation.
IR35 is a piece of legislation that aims to stop workers like contractors from claiming to be self-employed but operating more like disguised employees.
Early this year, further changes to the legislation were rolled out to the public sector, which has meant that thousands of limited company contractors have been at risk of getting caught out by the legislation which can lead to stressful and expensive investigations.
That’s why many contractors have decided to make the move to umbrella as this is an option that ensures they will not get caught out and can avoid the stress of worrying about IR35.
Enjoy continuity of employment
Finally, another pro to using an umbrella company for contractors is that, unlike a PAYE agency, it gives contractors continuity of employment.
This means that umbrella company contractors receive one handy tax code. This makes things such as applying for a mortgage or a loan much easier.
PAYE agency contractors, on the other hand, do not receive one handy tax code, which can make things much more complex for these contractors.
Cons of using an umbrella company
Those are the main benefits of using an umbrella company, so what are the cons?
Umbrella company fees
One of the downsides to working through an umbrella company is that each one charges a fee.
However, the good news is that umbrella company fees are competitive and therefore remain relatively low. In fact, contractors can expect to pay around the £15 a week mark.
What’s more, it’s important to remember that although limited company contractors do not pay a fee to an umbrella company, the majority will end up using the services of an accountant to guide them with their self-assessment and company finances which usually costs around the same, if not more, than an umbrella company.
Taking this into consideration, many contractors will opt to use the services of an umbrella company that offers a wide range of benefits to the contractor for a low cost.
If you have decided that an umbrella company is the best route for you, Umbrella Broker is here to help.
