What is an Umbrella Company?

As a contractor you have the choice to work for an umbrella company or to work for yourself, whether that’s as a limited company or personal ownership as a sole trader.

Working for an umbrella company offers a degree of convenience and simplicity, in no small part due to a reduced administrative burden, but umbrella companies also have some disadvantages and drawbacks that may not align with your needs and goals as a self-employed contractor.

All contractor’s circumstances are, of course, unique and a business structure that’s the right fit for one contractor won’t necessarily be right for another. To that end it’s important to assess the pros and cons of working for an umbrella company to fully understand the implications in terms of tax, compliance, earning potential, administrative obligations and more.

What is an Umbrella Company?

When you’re employed by an umbrella company, it is in effect like a traditional employer /employee arrangement. The umbrella company acts as an employment intermediary and will deal with agencies and end clients on your behalf, manage admin tasks such as invoicing, ensure legal compliance, and they will pay you.

They can also provide certain employment benefits such as sick pay, insurance and pension contributions. As a contractor you just have to do the work you’re paid for, submit your timesheets, and the umbrella company handles the rest.

In this post we’ll examine the disadvantages and advantages of working for an umbrella company and break down how contracting through your own limited company outside IR35 can provide increased control of your financial and tax affairs as well as more flexibility and control.

Let’s cover the umbrella company disadvantages first.

You’ll Pay More Tax

When you work for an umbrella company you are technically an employee rather than self-employed, and this results in a reduced level of overall financial control. Umbrella companies will usually use Pay As You Earn (PAYE) to pay you which means your tax is deducted from your entire salary at source, as well as the umbrella company’s fees.

PAYE means you have significantly reduced flexibility and control in terms of structuring your remuneration in a tax-efficient manner. As a result you’ll be paying a higher rate of tax so you’ll take home less of your earnings.

Reduced Allowable Expenses

When you operate through your own limited company a wide range of allowable expenses that have been incurred wholly and exclusively for business purposes can be deducted from your taxable profit which reduces your overall tax liability. This is not the case when you work under an umbrella company with the scope to claim allowable expenses significantly reduced.

Less Flexibility and Control

One of the key benefits of contracting through your own limited company outside IR35 is the high degree of autonomy and flexibility you have. This includes being able to set your rates, the jobs you take, your working hours or days, the location you work at, and as previously mentioned, how you pay yourself tax-efficiently.

As an umbrella company employee, you effectively forfeit that level of control. You will sign a contract of employment with the umbrella which determines the terms and conditions of the arrangement including the hours you work, the location, and what you’re paid, and you will need to adhere to any policies and procedures specified by the umbrella.

Some contractors are absolutely fine with this, but it can hinder career progression in the sense that it limits you from diversifying or pursuing new opportunities as well as preventing you from tailoring how you work to best suit your circumstances and lifestyle.

What are the Advantages of Working for an Umbrella Company?

Although working for an umbrella company eradicates a lot of the benefits of self-employment, there are some advantages too. Umbrella companies will handle the majority of admin tasks for you including payroll, dealing with end clients, and they will ensure compliance in terms of your tax obligations through PAYE.

As an employee of the umbrella you’ll also receive employment benefits including statutory sick pay, maternity/paternity leave, holiday pay and some umbrella companies also offer pension schemes and insurance coverage.

It would be remiss to not cover the pros and cons of contracting through your own limited company to assess the full picture when choosing your business structure.

Is a Limited Company Right for You?

In many ways contracting through your own limited company outside IR35 is the polar opposite of working for an umbrella. You are self-employed and have full control over your financial affairs which provides scope for a tax-efficient remuneration strategy.

By paying yourself through a combination of salary and dividends at a tax-efficient level, you can maximise your earning potential. You can also choose when you pay yourself which can further help from a tax optimisation perspective. More allowable expenses can be claimed too which can reduce the amount of Corporation Tax you pay. Ultimately, an outside IR35 limited company enables you to get more take home pay.

You also have full control and autonomy in terms of how you manage and run your business including long-term strategy, your rates, your end clients, your working hours and much more. This allows limited company contractors to progress their careers more quickly, pursue new opportunities and find a perfect work/life balance.

If your contracts are inside IR35 then the benefits of contracting through your own limited company diminish significantly, however, depending on your circumstances there may still be a benefit in operating through a limited company. From paying an accountant, who can assist with a wide range of business and taxation matters, as opposed to an umbrella company to being able to offset fees against future taxable gains – we’d always suggest it’s worth considering all options even if a contract is deemed inside IR35!

Contracting through your own limited company brings an additional level of responsibility, however, as you don’t have the umbrella to handle a lot of admin tasks. You have responsibility for paying yourself as well as your tax returns and filings and ensuring compliance. You also have the legal responsibility for maintaining company records, accounts and overall business performance.

The best way to maximise the benefits of working through your own limited company and ensure it is operating as tax-efficiently as possible, as well as ensuring your accounting and tax obligations are expertly managed, is to work outside IR35 with a limited company accountant. That’s where Gorilla comes in!

Our limited company accounting service eases the pressure allowing you to focus on your work. You’ll have peace of mind that all your business and personal accounting needs are being expertly handled by your own dedicated accountant who will provide you with unlimited support, advice and guidance. You’ll receive a same day response to your queries and full access to FreeAgent is included.

You’d pay a fee to an umbrella company for their services the same as you would to an accountant when you operate outside IR35 through your own limited company, but you get more value with an accountant. Over time an accountant will provide invaluable strategic advice and guidance including optimising your tax position to increase take home pay, so the monthly accountant fees are offset against future profits.

Call 0330 024 0406 or request a call back to speak to an accountant if you need advice on which business structure is right for you, or if you have any queries about our limited company accounting service.