Whenever you hear the word advantages, you know whats coming next, disadvantages and as with everything comparisoncontractor do have their disadvantages. One of these depends very much on both the type of contractor and the personal feelings of that contractor as it is the fact that unlike with a Limited Company, umbrella companies offer a very limited amount of control over what they do. By signing up with an umbrella company the contractor is agreeing to let them take over the majority of the control such as the processing of the payment, invoicing, paying of tax and even to a certain degree the expenses.
One of the benefits of contractors and working freelance is often seen to be the freedom and control that comes with working for yourself whereas whilst you still do have control over the work that you do, umbrella companies are essentially employers and offer quite a lot less freedom and flexibility than would be offered if they ran their own company. For those who are looking to start their own business and work as a contractor on a more permanent basis, they may wish to look at other structures such as the limited company. As mentioned it would give them more freedom and flexibility long term.
Arguably the biggest disadvantage of an umbrella company is the payment side. As an individual or limited company, when they invoice the client they are paid and have access to the funds immediately. However, the umbrella company is the one that actually gets paid and then they pay the contractor so their is a delay on payment being received. Some umbrella companies only distribute payments once a week or even once a month again causing further delay to contractors. Generally speaking this may not necessarily bother most contractors but many find every now and again they need to withdraw some money for whatever reason and as it is tied up in an umbrella company they are unable to do so whereas in a limited company they would more freedom to withdraw their money.
There are also fees that the Umbrella Companies charge for performing their services. The marketing of fees by different umbrella companies varies considerably. Contractors can expect to pay between £25-£30 per week for a top quality service while some umbrella companies charge on a percentage bases but will usually be prepared to negotiate if you are on a particularly high rate.
There are also tax implications for example for contractors earning revenue outside IR35 there is a significantly higher tax burden than using a Limited Company – due to the Managed Service Company legislation (introduced in the 2007 Budget).
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