What are the disadvantages of Umbrella company?

Chris Andreou

April 21, 2021

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Contractors

The drawbacks to working through an umbrella company are:

  • You’ll have less control compared to running your own company.
  • You may find it more tax efficient to operate through a limited company.
  • There are a number of umbrella companies operating illegal arrangements, so you’ll need to exercise caution before signing a contract.

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How do I become a contractor?

To become a contractor, you need to:

  • Do your research: The first step you'll need to do is to conduct in-depth research, and think through various important factors-from finances and tax implications, to lifestyle and business opportunities-to ascertain if becoming a contractor is the right decision for you.
  • Decide on how you'll operate: As a contractor, you may operate as a sole trader, through your own limited company, or work with an umbrella company or recruitment agency.
  • Develop a business strategy: Strategic planning isn't set in stone-but working out a plan is still helpful, as it is a way for you to consider multiple perspectives, identify potential opportunities and pitfalls and conceptualise back up plans you could fall back on.
  • Get your business finances and insurance sorted out: Setting up a business bank account, registering a company, determining the level of accounting support you need and investing in business insurance are important aspects you need to sort out before you begin contracting.
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Contractor Business Services UK

Firstly, we'll start with the services that we provide which covers the critical things you'll need to start and operate your contracting business.

For those just getting started, we provide free company registration on Companies House. This is typically done within 24 hours of submitting your details to Forma. It can take under 5 minutes to provide all your details and we'll just need a proof of ID and proof of address for each of the company directors.

We cover all of your key company filing requirements like annual accounts, confirmation statements, corporation tax and ensuring you meet all filing deadlines.

We also help with your annual Self Assessment which is a requirement for all company directors.

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Is a contractor self employed?

Contractors can be self-employed, a worker or an employee. Those who are employed through an umbrella company or an agency could be considered a worker or an employee.

If a contractor is a sole trader or runs a limited company, he or she will then be considered a self-employed person.

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What is an independent contractor?

An independent contractor is an individual who is engaged in a work agreement with a company or entity as a non-employee.

Factors that identify an independent contractor are:

  • They have a greater degree of control over their work
  • They offer a special skill set
  • They are able to get a replacement
  • They aren't entitled to employment benefits
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What is a Contractor?

You've been thinking about making the leap from employee to self-employed. If contracting is one of the options you're considering, this article is for you.

We'll run you through the basics, including what it means to be a contractor, how it differs from full-time employment and the type of business structures that contractors typically choose.

Contractors are self-employed individuals who provide services to a business. Generally, they're highly skilled, and are hired for projects that require specialist skills or to bolster a team during busy periods.

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What is subcontracting?

As an independent contractor, there may come a point in time where you need to consider subcontracting-you might decide to take on work as a subcontractor, or hire a subcontractor for your projects.

Whichever option you're exploring, how do you decide if the benefits truly outweigh the cons? And are there important tips you need to keep in mind?

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Umbrella Companies Explained: FAQs for Contractors

Whether you're newly self-employed or an experienced contractor, there'll be aspects that you need more information on when you're deciding if working through an umbrella company is right for you.

To help you along, we've compiled a list of FAQs that contractors often ask:


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What is an Umbrella company?

An umbrella company is an organisation that employs contractors working on fixed-term contracts. It acts as an intermediary between the contractor and their end client or recruitment agency.

The umbrella company provider will handle accountancy, administration, taxation matters and manage the payroll.

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19 Places to Find Contractor Jobs & Roles

When you get into contracting, it can get stressful when your project end date is just around the corner and you haven't secured your next role. This amps up even more once you finish a contract and you're looking for your next gig.

As a specialist contractor accounting business founded by contractors, one of the key questions we get asked is about where to find roles. So, we decided to compile a list of some of the best contractor job portals, platforms, recruiters and consultancies.

If you have anything else to add then please let us know at info@goforma.com.

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Umbrella vs Limited Company

Let's compare the advantages and drawbacks of setting up a limited company VS working through an umbrella company.

Why set up a limited company?

  • Limited liability
  • Tax efficiencies
  • Increased credibility

Why not set up a limited company?

  • Increased legal and administrative requirements
  • Less privacy; details of the company are publicly available

Why work through an umbrella company?

  • Ease of use
  • Flexibility
  • Entitled to statutory benefits

Why not work through an umbrella company?

  • Costly way to operate
  • Lack of control
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What are the different types of contractors?

There are different types of contractor jobs available across diverse sectors. Contractors may be hired to perform services such as:

  • Marketing
  • IT maintenance and support
  • Graphic design
  • Recruitment
  • Business development
  • Catering
  • Construction work
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How to Become a Contractor

So, you're thinking of becoming a contractor.

There's probably one of three reasons driving this:

You've received a Job Offer

You've just received a job offer, and now need to decide on whether to set up a limited company, umbrella company or become a sole trader (or you may not have the choice in deciding).

You're in the right place.

This guide will walk you through the best company structure for you, accounting support, VAT, business services you need to consider and finding new opportunities.

You want to increase your pay

You'd like to increase your pay by switching from permanent roles to interim/ contractor roles.

Contracting can be very lucrative.

You'll need to be comfortable with a certain level of risk (short notice periods), increased monthly admin (as a Limited Company) and less benefits than being an employee (paid leave, sick days).

However, you'll earn more, get greater flexibility and hopefully grow a consulting business.

Project Flexibility

Getting multiple requests for your services? Amazing.

Setting yourself up as a contractor through a Limited Company means you can start expanding your client base rapidly and work on different projects a few days a week.

You can still set this up as a current PAYE employee of a company, and this can be a great stepping stone to launching your own business.

Let's talk about the right business structure for you.

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What are the disadvantages of Umbrella company?

The drawbacks to working through an umbrella company are:

  • You'll have less control compared to running your own company.
  • You may find it more tax efficient to operate through a limited company.
  • There are a number of umbrella companies operating illegal arrangements, so you'll need to exercise caution before signing a contract.
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Ultimate Guide to Umbrella Companies

An umbrella company is an organisation that employs contractors working on fixed-term contracts. It acts as an intermediary between the contractor and their end client or recruitment agency.

The umbrella company provider will handle accountancy, administration and taxation matters. As such, when you work through an umbrella company, you won't need to take on the responsibilities that come with running a limited company.

They'll also manage the payroll. The umbrella company will collect the payment for the work you've completed from the end client or your recruitment agency. You'll then be paid through PAYE, and your taxes, National Insurance contributions and pension payments will be deducted at source.

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Guide to employing or hiring contractors

You have an important project at hand, and you require a contractor's specialist knowledge to fill in the skill gap in your team. You're ready to hire-except that you're unfamiliar with the hiring process.

If this is your first time hiring a contractor, our article will guide you through the essentials.

We'll cover the following:

  • Sourcing for contractors
  • Assessing contractor CVs
  • Interviewing a contractor
  • Payments
  • Contract terms
  • Terminating a contract
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What are the advantages of an Umbrella company?

The advantages to working through an umbrella company include:

  • You'll deal with less administrative work. It's also quicker and easier to join an umbrella company, compared to setting up your own limited company.
  • As an employee of the umbrella company, you're entitled to statutory benefits
  • It can be a great option for short term contractors, as they won't have to go through the hassle of setting up a limited company and making the arrangements for it to be dissolved.
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Employing contractors

There are a few steps you'll need to consider with hiring contractors. These include:

  • Sourcing for contractors
  • Assessing contractor CVs
  • Interviewing a contractor
  • Payments
  • Contract terms
  • Terminating a contract
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What is a contractor?

A contractor is a professional that provides skills and services to a specific client under set terms. The terms can be for a set number of hours, a certain time frame or duration of a project.

A contractor is responsible for their own dealings and has discretion over the work they carry out.

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A Guide to Claiming Umbrella Company Expenses

When you work through an umbrella company, there are a few types of expenses you may be able to claim for:

Client billable expenses

These expenses are agreed upon prior to the engagement, and are paid for by the end client or agency.

Business costs

Business costs are expenses that are necessary for the performance of your work.

Examples include professional materials (such as textbooks and manuals), training, electronic equipment and parking fees. These will be reimbursed tax and NICs free by your umbrella company.

Non-client billable business expenses

These expenses won't be reimbursed by the end client or agency, but can be claimed as allowable expenses from HMRC-provided that the expenses are incurred "wholly, exclusively and necessarily" in the performance of your work.

Here are some examples of allowable expenses you can claim for:

  • Mileage
  • Professional subscriptions
  • Protective clothing
  • Stationery, postage, phone and internet
  • Business entertainment
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What are the disadvantages of contracting?

The disadvantages of contracting are:

  • Uncertainty: Due to the flexible nature of their working relationships, contractors aren't guaranteed work after the end of assignment or project.
  • Responsibility: Not only is it the responsibility of the contractor to find work, they are also responsible for their own finances.
  • Employment rights: As a contractor, you generally wouldn't find yourself holding employment rights that permanent employees benefit from.
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