Contractors use umbrella companies for a wide variety of reasons. PAYE schemes offer the easiest way to contract, and you will also be 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.
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 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.
- You don’t need to file an annual self-assessment form, unlike limited company directors, unless you earn other untaxed income from other sources.
- You don’t need to set up a separate business bank account for your contract earnings. You will get paid into your personal bank account.
- 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 provide 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. Limited company contractors have a tax advantage, although this has reduced in recent years.
- 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 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.
- 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 use an umbrella provider. This is particularly true following the introduction of the Off-Payroll (IR35) rules – for public sector contractors (after April 2017), and private sector contractors after April 2021.
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.