The Pros and Cons of Locums Using an Umbrella Company

In the ever-evolving landscape of contract work, locum professionals, particularly in sectors like healthcare and education, often face a decision on how best to manage their employment arrangements. One popular option is through an umbrella company. This article explores the benefits and drawbacks of using umbrella companies for locums. Our usual advice as a locum recruitment company, is to avoid them like the plague wherever possible, but this is a balanced article!

What is an Umbrella Company?

An umbrella company acts as an intermediary between a contractor (locum) and their client. The umbrella company employs the contractor under an overarching contract of employment and takes responsibility for invoicing the client, collecting payments, and then paying the contractor as an employee, handling National Insurance contributions, and processing income tax through PAYE (Pay As You Earn).

Pros of Using Umbrella Companies

1. Ease of Use: The primary advantage of using an umbrella company is convenience. The umbrella company handles all the administrative burdens associated with contracting, such as payroll, taxes, and compliance with HM Revenue and Customs (HMRC) regulations. This setup allows locums to focus solely on their professional responsibilities without worrying about the complexities of self-employment tax affairs, although our experience of this is that self-employment is incredibly easy to navigate.
2. Employment Rights: Unlike self-employed contractors, locums employed by an umbrella company gain employee status, which entitles them to employment rights such as sick pay, holiday pay, and access to a workplace pension. This can provide a significant advantage in terms of job security and benefits. Not sure this adds much as a locum though – because firms you are contracting with will not expect to be granting paid holiday cover when they presume the arrangement is a business to business relationship.
3. Continuous Employment: For those who work with multiple agencies or clients, using an umbrella company can provide continuity of employment. This can be beneficial for mortgage applications or any financial situation where proof of continuous employment is advantageous.
4. No Need for Company Setup: Using an umbrella company eliminates the need for locums to set up and maintain their own limited company, which can be costly and time-consuming. It also avoids the administrative responsibilities that come with running a company. Of course, locums do not necessarily need to set up a company, and it can be so much easier just to work on a self-employed basis.

Cons of Using Umbrella Companies

1. Cost: The biggest downside to using an umbrella company is cost. Umbrella companies charge fees for their services, which can either be a fixed amount per week or a percentage of the contractor’s earnings. These fees can add up, especially for long-term contracts.
2. Reduced Control: By using an umbrella company, locums relinquish control over their financial affairs. The umbrella company takes care of invoicing and payments, which means the locum has less insight and control over the financial aspects of their contracts.
3. Potential for Misunderstanding and Misuse: There have been instances where umbrella companies have been involved in non-compliant schemes or have not been transparent about fees and deductions. It is crucial for locums to conduct thorough research and ensure they are dealing with a reputable provider.
4. Less Tax Efficiency: Generally, operating through an umbrella company is less tax-efficient than having a personal limited company. This is because, under an umbrella company, all income is taxed as employment income, and there is no scope for flat rate VAT schemes or claiming a broader range of allowable expenses.
5. You almost relinquish your status of being in a business to business relationship. No firms like giving holiday leave to a locum!

Cost

The typical weekly charge of an umbrella company in the UK can vary widely depending on the services provided, the contractor’s earnings, and the umbrella company itself. Generally, the fees can range from about £15 to £30 per week. Some umbrella companies might charge a fixed fee, while others might charge a percentage of the contractor’s earnings, usually between 1% to 5%.

It’s important for contractors to check what is included in these fees. Some umbrella companies offer comprehensive services including insurance cover, pension contributions, and access to employee benefits, which might justify higher fees. Always ensure that there are no hidden costs and understand exactly what services you will receive in return for your fees.

Before signing up, contractors should compare different umbrella companies, reviewing their fee structures and the additional services they provide to ensure they are getting the best value for their money.

Conclusion

Using an umbrella company can offer simplicity and security for locums who prefer not to handle their administrative tasks or set up a company of their own. However, it comes with higher costs, reduced control over financial matters, and potentially less tax efficiency. For those considering this route, it’s essential to weigh these factors against the benefits of employment rights and ease of use. Conducting diligent research and selecting a reputable umbrella company are critical steps to ensure that the arrangement meets your professional and financial needs effectively.

Our advice is usually to avoid umbrella companies if you are a locum solicitor working for SME law firms – there is little point to them and it just gets the firms’ backs up. Umbrella companies can be a right nuisance!