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.
This is traditionally seen as the “hassle-free” way of contracting. You can be up and running in a matter of hours with an umbrella provider. You don’t need to set up your own company or hire an accountant.
Low administration
Your umbrella takes care of all of your administration, chasing payment, and processing your payroll and any 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.
You don’t need to set up a separate business bank account for your contract earnings. You are an umbrella company employee – the same as a traditional employee. You’re not running your own business – as is the case for limited company directors.
Low-risk way to try out contracting
If you are unsure if contracting is the life for you, working via an umbrella company offers a low-risk way of trying things out. You can easily form a limited company at a later date if you choose.
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 decide to draw down funds and carry them over into future tax years to lower 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 control over your affairs to the same extent as a limited company contractor does. 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 who claim you can make money from expenses claims.
You can only claim back for costs legitimately incurred as a result of carrying out your contract work.
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.
