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What is an umbrella company? A guide for self-employed contractors

3-minute read

Sam Bromley

9 March 2021

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Self-employed contractors can choose to work through an IR35 umbrella company rather than setting up their own limited company.

But the advantages of using an umbrella company often depend on your IR35 status and whether you’re contracting for the long-term. Should you use one?

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Umbrella company definition

An umbrella company, or PAYE umbrella, is a company that self-employed contractors can join as an alternative to setting up (and working through) their own limited company.

When you join an umbrella, you become their employee. The umbrella acts as an intermediary between you and your recruitment agency (or end client). It deals with administration (like accountancy and taxes) and means you don’t have to take on the responsibility of running your own personal service company.

Your umbrella company also handles payroll. They invoice and get paid for the work you complete. Then they pay you through PAYE, deducting costs like taxes, National Insurance contributions and workplace pension payments.

Why use an umbrella company?

Running a limited company can be challenging and won’t always be the best choice for contractors.

If you’re a new contractor, you might not want the hassle of setting up a limited company straight away. Likewise, if you know you’ll only be contracting for a short time, you won’t want to go through the process of setting up a limited company only to dissolve it in the future.

You can do away with administration by using an umbrella company. It means you won’t have to keep company records, file VAT returns, and keep up with all the other responsibilities you would have as a limited company director.

When it comes to getting paid, the contractor keeps timesheets, which they give to the umbrella company. Payroll is then processed from there.

But if you do all your contracting through an umbrella company, you won’t enjoy the tax efficiency of a limited company, as pay is subject to PAYE whatever a contract’s IR35 status.

IR35 umbrella company status

A contractor can work on contracts both inside and outside IR35, as IR35 status applies to contracts and not to the contractor themselves.

Some contractors who only work inside IR35 might choose to use an umbrella company to reduce administration (and because calculating tax and National Insurance can be complex).

You can still run a limited company and work on inside IR35 contracts. You can even run a limited company and work through an umbrella company at the same time.

Umbrella company advantages and disadvantages


  • contractors get rights – as an employee of the umbrella you can get statutory sick pay, holiday pay, maternity and paternity pay, and a workplace pension
  • reduced administration – the umbrella deals with invoicing, chasing payment, sending timesheets and your payroll
  • useful for short-term contractors – you don’t need to set up a limited company (and deal with everything alongside it, like registering with Companies House)


  • tax efficiency – umbrella companies put you on the payroll via PAYE, meaning all of your income is salary, and they’ll also deduct their fees (umbrella membership can cost around £30 a week)
  • you don’t have as much control – running a limited company means you’re in control of your business, from its finances to administration and the method you pay yourself
  • not all umbrella companies are compliant – some of the more unscrupulous ones promise to reduce your tax liability and increase your take-home pay, so make sure you do your research. As a start, find out whether the umbrella is a Freelancer & Contractor Services Association (FCSA) member

How umbrella companies work – step-by-step

  1. When you secure a role, your umbrella company signs a contract with your recruitment agency (or end client). You’ll also need to sign a contract with your umbrella.
  2. You agree to the time spent on site working on projects and document this in timesheets, which you pass to your manager to sign.
  3. You pass your timesheets to your umbrella (and recruitment agency if you have one), who invoice the client.
  4. When your umbrella gets the payment, they’ll process your payroll. You’re paid a salary, which deducts income tax, National Insurance contributions, pension contributions and the umbrella fee. You can reclaim allowable expenses, which your umbrella should process too.
  5. Your umbrella gives you a payslip that shows your take-home pay as well as all the deductions.

Use this as a guide only and keep in mind the right choice for you will depend on your circumstances – it’s best to research your options and speak to a professional if you’re not sure.

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We create this content for general information purposes and it should not be taken as advice. Always take professional advice. Read our full disclaimer

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