Choosing an Umbrella Company: The Good, Bad and Ugly

Going it alone amidst the chaos of an uncertain job market is certainly a commendable decision, however, freelancers and contractors are faced with two options to handle their careers, opting for a limited company structure or being a part of an umbrella company. While a limited company comes with its own share of advantages and disadvantages, an umbrella company is no different but it certainly offers a chance to those just embarking on their careers to get valuable first-hand experience on the different job opportunities in store and also enable them to work with many different clients on a simultaneous basis.

So why choose an umbrella company in the first place?

As seen earlier, the option allows first-time job seekers a wide choice of assignments and exposure to several work types and client. One can experiment with job choices without any major risks.
 Freelance or contract jobs, being short-term in nature, require more attention on the job, rather than on the paperwork, administration, invoicing and taxation-related tasks. An umbrella company ideally takes care of all back-office tasks increasing the productivity of the employee.
 PAYE schemes ensure that tax and NIC are deducted at source, taking care to meet all tax requirements automatically. Records of timesheets, invoices, payments cleared, insurance premiums and tax payments are available with the umbrella company for any future reference.
 Job security and cross-references are also added advantages of this option as freelancers are constantly on the lookout for the next assignment and are required to furnish references each time.
 Additional leave benefits, basic insurance schemes, financial and pension options, health and child care benefits may also form a part of the service deal.

Most reputed firms offer the best of umbrella services for a fixed fee; however, not all umbrella companies enjoy a good reputation; the picture is not as rosy as it seems in case one makes a wrong choice.

The Flip Side of the Picture

Although contractors and freelancers seem to have more freedom, flexibility and control over their work, signing up for an umbrella service necessarily means that one is still treated as an employee of the umbrella company, with of course the choice of assignments, work hours still being open.

Cash flow is certainly restrained as one does not have instant access to funds. Umbrella firms usually offer weekly or monthly payment options, which in real time may cause problems as the payments from clients first reach the firm, before being paid out to the freelancer.

Tax burdens on revenue earned outside the IR35 are higher than a limited company structure.

The Ugly Side

Umbrella companies generally offer standard set of basic services in order to stay in the game. Staying ahead of the stiff competition is also quite important for these firms who also tend to promise a few gifts and claim to reimburse most expenses. Offers on tax-free expenses, benefits related to offshore assignments, foreign currency payments and loans may actually be based on tax avoidance, leading to the individual being drawn up by HMRC for tax violations.

It is important for freelancers to read the fine print before being lured by these promises while choosing an umbrella company, even if referred by an agency or some other third party!

Written by David Webster. David has worked at Dasa Consulting Ltd. in Borehamwood, England since 2008. He currently deals with IR35 issues in their contractors accountancy department. David studied finance at university and is currently studying to take an ACCA qualification, he hopes to go on and become a chartered accountant.