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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.

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.

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 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.

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 – 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.

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 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.

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

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.

Further reading

UCUK Special Offer - £12/week umbrella!

Last updated: 15th January 2024