When Shouldn’t You Use an Umbrella Company?

When an Umbrella Company isn’t right for you

What is an Umbrella Company and how does it work?


An umbrella company employs a contractor, therefore acting as an intermediatory between the contractor and client.

As the contractor’s employer, the umbrella company takes on a range of roles and responsibilities on the contractor’s behalf.

Firstly, the umbrella company pays the contractor a salary. The umbrella company collects the fee directly from the client and will then process it through the PAYE system, meaning the contractor’s tax and National Insurance obligations are taken care of. This means that the contractor isn’t faced with having to file for self-assessment which can often be time consuming and complex.

This also means that there’s no need for the contractor to invoice the client and chase any late payments, as this is all taken care of for them.

What’s more, as an employee of the umbrella company, the contractor also receives statutory rights, including holiday pay, sick pay, maternity and paternity pay and a workplace pension.

This is seen as a welcome benefit by many umbrella contractors as it means should they wish to take a break, or unexpectedly become ill, they will still get paid. Find out more about statutory payments for contractors in our handy guide.

An umbrella company will also deal with tasks such as paperwork, admin and things like processing expenses. This means that the contractor is free to get on with the contract at hand, while the business side of being a contractor is taken care of by the company.

For these reasons, the umbrella company route is considered an easy and hassle-free way of contracting by thousands.

However, there are other options when it comes to contracting, mainly contracting as a self-employed contractor. In this case, the contractor must set up their own limited company which they will then contract through.

Why not use an Umbrella Company?


Some contractors might choose the limited company route over using an umbrella company.

Here, the contractor is responsible for finding their own contract work, negotiating the terms and fee with the client directly, chasing payments from the client, filing for self-assessment and calculating what they owe in tax and National Insurance.

As well as these tasks, the contractor must also take on the roles and responsibilities that come with running their own company, including paperwork and admin.

The benefits to the limited company route are that the contractor has complete freedom over their contracting career and finances, which is why some contractors might consider taking this route over the umbrella company route.

However, it is worth considering that running a limited company whilst also taking on a contracting role can be time intensive and energy consuming.

After all, tasks like filing for self-assessment can be tricky and complex, so many limited company contractors will use the services of an accountant, which comes at an additional cost to the contractor. The self-employed contractor also gets paid their fee before tax and National Insurance are deducted from it, meaning they have to plan carefully to ensure they set aside enough to cover their tax bill.

A limited company contractor also has to set aside time to deal with running a business, including doing their own book keeping, paperwork and admin. Again, this can take up the contractor’s precious time and energy which could be focused elsewhere.

Another consideration worth noting is that self-employed contractors do not receive the statutory benefits that an umbrella company contractor does. This means that if they wish to take a holiday, or indeed they unexpectedly fall ill and have to take a break from the contract, they will not get paid and will not receive statutory pay, meaning these costs must be covered from the contractor’s own pocket.

What about IR35?


Every contractor will have heard about infamous IR35 legislation. This was the piece of legislation that was set up to stop contractors from claiming to be self-employed and therefore enjoying the tax benefits of this, yet that actually worked more like employees.

The great news for umbrella company contractors is that they are exempt from IR35. After all, they are employed by the umbrella company, meaning the legislation doesn’t apply to them.

However, the same can’t be said for limited company contractors.

In 2017, reforms were made to the legislation which made it the responsibility of the client, rather than the contractor themselves, to establish the contractor’s IR35 status within the public sector. This lead to thousands of contractors being wrongly classified as inside IR35 and paying a lot more in tax than they should be.

In April this year, these same rules were extended to the private sector, leading to thousands of limited company contractors being badly impacted. For this reason, many have now switched, or are considering switching to umbrella.

If this is the case, Umbrella Supermarket are here to help with the next steps.

Umbrella Supermarket are here to help


If you’ve decided umbrella is the right option for you, it’s time to find the best umbrella company out there for you. That’s where we can help.

Simply use our handy umbrella calculator and we will show you a list of the best suited umbrella providers for your needs, based on your contractor rates and preferences. We will even show you how much you will get paid with each, showing you what your payslip will look like with each provider.

Ready to make the move to umbrella today?

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