The pros and cons of contracting via an umbrella company

Contractors use umbrella companies for a wide variety of reasons. PAYE schemes offer an easy way to contract. You are also free of the administrative burden carried by limited company contractors.

If you are caught by the IR35 rules or on a short-term contract, then joining an umbrella company could be the solution for you.

In some cases, you may have to work through an umbrella company because the client or agency insists on it, even if you would prefer to trade through your own limited company.

Following our article on the pros and cons of contracting through a limited company, we now consider the advantages and disadvantages of contracting through an umbrella company.

Working via an umbrella – the pros

Hassle-free

This is traditionally seen as the “hassle-free” way of contracting. You can be up and running within hours with an umbrella provider. You don’t need to set up your own company or hire an accountant.

Low administration

Your umbrella handles all your administration, payment chasing, payroll processing, and expenses. All you need to do is submit your timesheets promptly, and any other paperwork, such as expense claims.

Good for short-term and low-rate contracts

Umbrella companies are a good solution if you take on a short-term contract, or have a low hourly contract rate.

No self-assessment worries (in most cases)

You don’t need to file an annual self-assessment form, unlike limited company directors, unless you earn other untaxed income from other sources. This includes child benefit if either you or your partner earns £50k or more per year.

No need for a separate business bank account

You don’t need to set up a separate business bank account for your contract earnings. You are an umbrella company employee, just like a traditional employee. You’re not running your own business, unlike limited company directors.

Low-risk way to try out contracting

If you are unsure whether contracting is the right fit for you, working through an umbrella company offers a low-risk way to try it out. You can easily form a limited company at a later date if you choose.

Employment rights and protections

As an umbrella employee, you have access to statutory employment rights, including holiday pay, workplace pension auto-enrolment, and statutory sick pay (subject to eligibility and scheme rules). This can be reassuring if you are new to contracting or prefer the structure of PAYE.

Working via an umbrella – the cons

Not as tax-efficient as a limited company

Umbrella companies do not provide some of the tax benefits associated with limited companies.

Your umbrella deducts PAYE and NICs from your salary, together with their weekly or monthly fee.

Limited company contractors have a tax advantage, as no NICs are payable on dividends. The tax advantage has reduced massively in recent years, however, due to increases in dividend and Corporation Tax rates.

You can’t take advantage of tax planning opportunities

If you set up a limited company, you can split the share ownership with other family members, such as a spouse. This means that you and your co-shareholders can benefit from separate tax allowances.

Limited company directors can also elect to draw down funds and carry them forward into future tax years to reduce their tax bills.

As an umbrella contractor, you are paid via PAYE at fixed intervals. There are minimal tax planning opportunities.

Less control over your contracting affairs

You don’t have the same level of control over your affairs as a limited company contractor. This isn’t necessarily a ‘disadvantage’, however. It can also be an advantage not to have to worry about such things!

Limited scope to claim business expenses

Beware of umbrella companies that claim you can profit from expense claims.

You can only claim back costs legitimately incurred as a result of carrying out your contract work.

In recent years, the umbrella expense rules have been tightened up significantly, find out what typical expenses you can still claim back.

You rely on the umbrella’s compliance

When you work through an umbrella company, you are relying on that provider to operate PAYE correctly and comply with tax and employment law.

If an umbrella is non-compliant, for example, by operating disguised remuneration or incorrect deductions, you could end up facing an HMRC investigation into unpaid tax. That’s why it’s essential to choose a reputable provider.

April 2026 JSL rules may reduce choice and increase scrutiny

From 6 April 2026, new HMRC rules introduce joint and several liability (JSL) for PAYE in labour supply chains that include umbrella companies.

In practical terms, this is designed to make agencies (and, in some cases, end clients) share the risk if an umbrella in the chain fails to account for PAYE correctly, rather than HMRC pursuing only the umbrella provider.

The likely knock-on effect for contractors is that agencies and clients will tighten their due diligence, restrict which umbrella companies they will work with (often via preferred supplier lists), and may move more workers onto fewer, more tightly controlled payroll routes.

This can mean less flexibility in choosing an umbrella provider and more checks before you can start.

For official guidance, see: PAYE rules for labour supply chains that include umbrella companies from 6 April 2026.

When using an umbrella company is not necessarily a choice

In some cases, you might not have a choice between setting up your own company or using an umbrella provider.

You may find yourself in a situation where a client doesn’t allow you to work as a limited company contractor, so you have no choice but to go down the umbrella route.

This is particularly true following the introduction of the Off-Payroll (IR35) rules, for public sector contractors (since 2017), and private sector contractors since April 2021.

Some clients are risk-averse. Rather than taking responsibility for determining the employment status of contractors, they have implemented blanket bans on limited company hires.

The pros and cons of contracting via an umbrella company