Contracting via an umbrella company – advantages and disadvantages

Once upon a time, contractors were almost certain to start a Limited Company as a way to run their operations. Over the past decade or two, however, the concept of using an umbrella company has become increasingly common.

But is the idea of becoming an ‘employee’ of a company that handles the payments related to your contractor jobs one that can work for you? Let’s take a look below.

The Advantages Of Using An Umbrella Company

There are hundreds of umbrella companies out there, which should give you a fantastic opportunity to find a suitable solution. When you do, the following benefits can be gained.

  • You can be up and running the very same day, especially once you’ve decided on which umbrella company to use.
  • The umbrella company takes care of National Insurance Contributions and income tax on your behalf, meaning the salary you receive is yours (as would be the case with normal employment).
  • Using an umbrella company allows you to bypass the time-consuming paperwork linked to filing accounts, etc.
  • You’ll know exactly how much you are paying for the fees, and won’t get dragged under by hidden business expenses.
  • The umbrella company chases payments on your behalf.
  • You can start and end your agreement with ease, making it a far less cemented commitment than starting a Limited Company. This is great for testing the waters.

This is still seen as the alternative way of handling your contracting operations. However, the hassle-free approach is regarded as an attractive prospect for many contractors old and new, particularly as it removes the fear of doing things wrong. Under the right circumstances, it can be ideal.

The Disadvantage Of Using An Umbrella Company

The demand for umbrella schemes is growing by the year, but the concept of setting up a Limited Company remains the most common pathway for contractors in many fields. This option offers some features that the umbrella schemes cannot match. Here’s where being an ‘employee’ can fall short;

  • Using an umbrella company prevents you from gaining the tax benefits that could be obtained from paying yourself partly through Limited Company dividends.
  • Umbrella companies will charge a weekly or monthly fee, which needs to be factored in. In some cases, they may even want to take a commission – steer clear of these operations.
  • You won’t have the same level of control over financial matters and may not be able to expand and grow as you could as a business.
  • When approaching clients, you won’t have the power of a brand behind you.
  • Some umbrella companies will feed you false promises regarded expenses and other features, leaving you in a worse scenario than what you’d forecast.

The disadvantages will outweigh the positives for some contractors, which is why they are worth knowing. Nonetheless, the growing demand for the hassle-free approach to handling contracts cannot be ignored. For some, it will be the perfect option.

Which Is The Right Option For You?

The choice between using an umbrella company or taking the traditional route is largely one of personal preference and requires weighing up the pros and cons related to money, time, and emotional hassle. Take the time to consider all aspects, and it will provide the perfect platform for your future contracting activities.

If you are a contractor and need to compare umbrella companies then get started here