Pros and cons of using an umbrella company

23 June 2020

For newcomers to contracting, the umbrella option offers great flexibility and simplicity.  It can be a great stepping stone to a limited company if you are looking to build on your contracting career and earn more. In this article, we are looking at the advantages and disadvantages of using an umbrella company:


Don’t have to manage your taxes

When you engage with an umbrella company, you become its employee, so all your tax and NI payments get deducted at the source. No worries about keeping on top of payment deadlines then.

Cheaper than running a limited company

The margin umbrella companies deduct from your earnings is about the third of the fees an accountant would charge for the services required to run a limited company.

No chasing invoices/time savings

When you run your own business chasing payment is one of the most time consuming (and frustrating) activities you may have to do. No the case with umbrellas, because they do the chasing for you.

Easy route if you are caught by IR35

You must have heard about the IR35 legislation (if not, visit here)? If you are using an umbrella company, you don’t have to worry about it as it only applies to PSCs (limited company contractors).

A way to contracting

Are you new to contracting and want to give it a go before you commit? There are no commitments with an umbrella firm, complete a short contract, and if you decide that freelancing is not for you, you can simply stop and go back to a permanent role.

Ideal for short-term assignments

If your contracts are about six months or shorter, it might not be financially viable to incorporate a company, so a cheaper umbrella solution is just the right solution.

No self-assessment is required (unless you have other income)

Because you work as an umbrella company employee, you don’t have to worry about completing a self-assessment return every year (unless you have other sources of income, of course). Here is a recent article we wrote about the topic.

Insurance cover included

Worried about insurance cover? Don’t; reputable umbrella companies (like us) include all the necessary protection you need to feel safe in your contracting role.


All the above advantages, of course, have some trade-offs, so let’s see what you are trading in to enjoy umbrella benefits.

Retention rate (provided that you are outside IR35)

Using an umbrella company, you will not be able to retain as much of your earnings as you would with a limited company. The latter gives you more control over your finances and allows for a more tax-efficient operation.


Although you can claim certain expenses as an umbrella employee, you will not be able to get tax relief on most. Business laptops, mobile phones and a company car are a privilege only for those that have a limited company.


Do you aspire to build a brand? Perhaps develop a unique service or product? Being an employee of an umbrella company, you will not experience the freedom a limited company can provide. Research and development tax credits, tax relief on assets and training are only available for limited company contractors.


Since April 2016, umbrella employees can only claim expenses if they are not deemed to be working under supervision, direction or control (SDC). Most umbrella companies will ask you to fill in a questionnaire to determine if your travel expenses will have tax relief applied to them or not.

We hope that the above has been a useful insight for those looking into contracting. If you’d like to read about limited company trading in more detail, please visit our sister company’s article on this link.

To discuss what SmartWork can do for you, please do not hesitate to contact 0800 434 6446; one of our business managers will be happy to answer any questions.

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