More than 7 in 10 (74%) contractors are not happy working via umbrella companies
Research by the self-employment trade body, IPSE, has revealed that despite an increase in the number of contractors working through an umbrella company, many believe there are no advantages to working this way.
Since IR35 reform came into force in the private sector in April 2021, there has been a significant rise in freelancers and contractors operating via umbrellas.
However, more than three in five (61%) of those working this way do not believe it offers any benefits, with the majority (69%) claiming that they had no alternative.
A further two-thirds (63%) of contractors stated that while they had some level of choice, they were given a limited range of umbrella companies to choose from. Five per cent, meanwhile, had no say and were allocated an umbrella company to work through.
Contractors’ day rates have fallen
The study also found that nearly three-quarters of contractors polled were dissatisfied about working via an umbrella, with half stating they were “very dissatisfied.”
When asked why, 80 per cent of respondents cited the fact that they now have to cover the liability for employer’s national insurance, and where applicable, the apprenticeship levy, through a reduction in their day rate.
In addition, over half (57%) believed their role should fall outside the scope of IR35, but the supply chain would not allow them to take the risk of working through their own limited company.
As a result, around 70 per cent reported having lost their independence.
Forced umbrella working threatens contractors
Andy Chamberlain, director of policy at IPSE, said: “The fundamental problem here is that people are being forced into pseudo-employment relationships they do not want.
“Since the IR35 changes came in a year ago, thousands who proudly consider themselves self-employed are being pushed into umbrella companies under disadvantageous conditions, often without even a choice over which umbrella company they use.
“[The] report was shared with the government following their recent call for evidence and we hope that they listen to us and the many umbrella company workers that have failed to see the benefits of working via an umbrella company.
“In particular, we hope that they put forward recommendations that stop freelancers from being forced into working for umbrella companies that limit their independence and give them no real benefits.”
Responding to IPSE’s study, Joanne Harris, head of technical, compliance and payroll at umbrella firm, Parasol, said: “There’s no doubt that the IR35 reform in 2021 has had a significant impact on how contractors work and the initial reaction from many businesses caused a huge shift to umbrella employment.”
Further education for end-hirers needed around IR35 rules
She added that according to Parasol’s Annual Contractor Survey, two-thirds of contractors reported being impacted in some way by IR35, with almost a half (46%) describing it as “very negative”.
“Many providers, including Parasol, have also created a solution that gives contractors the option of switching between umbrella employment and PSC working”, Harris explained.
“This dual approach means that contractors can work on contracts requiring employment through their umbrella company, while also taking on assignments that fall outside IR35 through their limited company.
“Now that some time has passed since the rules were introduced, we are starting to see more confidence and some settling down across many sectors. However, further education is needed for end hirers on IR35 to ensure contractors feel fairly treated and have confidence that their status is being accurately determined for every assignment.”
Well of course Parasol would say that – they get the money for the limited company plus the extra they make for the umbrella service! If all the contracts were outside IR35 they’d only get the money for running the limited company. Contractors lose out whichever way you look at it.
The issue mainly with Umbrella companies is they are commision driven.. I used one of the “best” Umbrella but after spending years locating a descent accountant that wasn’t going to lose my property later due to miss handling of my accounts.. My Umbrella company in less than a month screwed up my income tax, mainly because they are setup for a full tax year processing and struggle to work with multiple income sources or advise on tax efficient ways of working i.e salary sacrifise.. They are NOT accountants and do everything like 1st line support workers (read from a set sheet). Also you get landed with there 3rd party companies that again are commsion driven and don’t care if you lose as losng as they win. I’ve dropped 30k and gone staff, absolutely hate what I”m doing so literally 9-5 full lunches and no free overtime plus I have to smile at the verbal diarea the company delivers at the allhands meetings.
I negotiated a day rate with a company then, to the surprise of my contact, was told their policy was to only take on contractors through an umbrella company, which they would nominate.
Regretfully I walked away.
One benefit is that almost all umbrellas run a salary sacrifice scheme. Almost 100% of permanent recruitment agents don’t have the foggiest idea what that is – they struggle to understand that it isn’t a pension scheme.
Issues with latest regs are that companies are making status determinations PRIOR to appointing a contractor rather than take the appointee’s circumstances into account in the SDS.
Also, many are taking a blanket inside approach which is not supposed to be legal.
It’s past time IR35 was a thing of the past. The de facto way is to remove Employers NI from the equation, without that all workers are essentially the same, although the ability to contribute to a spouse’s pension is a major benefit to a Ltd Co.
The rise in the number of contracts through a consultancy shows that these people have got what they wanted from al their lobbying – the quality of outcome from using a consultancy shows that not only is the contractor a net loser, but also the end client is the loser.
…obviously speaking to any of the Umbrella Companies is always going to come with a positive spin! I got offered a great contract on a fantastic hourly rate only to end up worse off after paying my expenses and travel that I had to leave. The Umbrella offered to do my tax return at a cost at the end of the year but as you go on to find everything they do or offer is at a further cost!