Contracting via an umbrella company – advantages and disadvantages

Contractors use umbrella companies for a wide variety of reasons. PAYE schemes offer the easiest way to contract, and you will be free of the administrative obligations carried by limited company contractors.

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

Following on from our article looking at the pros and cons of contracting via a limited company, here we consider the advantages and disadvantages of contracting via an umbrella company.

Advantages of umbrella companies

  • 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.
  • The umbrella company takes care of all your invoicing, administration, chasing payment, and processing your payroll.
  • Umbrella companies are a good solution if you are working on a short-term contract, or receive a modest hourly contract rate.
  • You don’t need to concern yourself with admin or paperwork, such as dealing with accountants, HMRC or Companies House.
  • 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.

Disadvantages of umbrella companies

  • Umbrella companies do not have the tax benefits associated with limited companies. The umbrella will deduct PAYE and NICs from your salary, together with their weekly or monthly fee. All your income will be in the form of salary.
  • You don’t have control over your affairs to the same extent as a limited company contractor does.
  • Beware of umbrella companies who claim you can make money from expenses claims. You can only claim back expenses which have been genuinely incurred during the course of your contract duties.

Further information

Read the first article in the series, which looks at the advantages and disadvantages of contracting via a limited company.

We have dozens of expert guides to help you make your decision elsewhere in our umbrella company section.

If you are considering joining an umbrella scheme, try our list of umbrella company providers as a starting point.

Last updated: 20th October 2019