Contracting via an umbrella company – the pros and cons

Most contractors operate either via a limited liability company, or an umbrella company (which is operated by a professional firm). Here we look at the pros and cons of contracting via an umbrella company

Advantages

• It is very easy to get set up with an umbrella company. This is very much the ‘hassle free’ way to contract.
• If you have a short-term contract, an umbrella company is a particularly good option, as setting up a limited company for a short time does involve a fair amount of administration.
• If your contracts are caught by the IR35 tax rules, the tax benefits of working via a limited company are massively reduced, so an umbrella company is a very good solution.
• You don’t need to hire an accountant, as all tax calculations and other administration is carried out on hour behalf by the umbrella company.
• You don’t have any of the legal or financial obligations of a limited company contractor.
• You don’t have to spend any time on paperwork, and only have minimal administrative duties to carry out (e.g. submitting your timesheet, or collecting all your expense receipts!)
• If you just starting as a contractor, and aren’t sure if contracting will work out for you, then an umbrella would enable you to get started without any of the complications involved in running your own limited company.

Disadvantages

• Umbrella companies are not the most tax efficient ways to contract. You pay income tax and NICs on your entire income. Limited company directors (who are not caught by IR35) can pay themselves a small salary (with no income tax or NICs payable), and draw down the rest of their income in the form of dividends, which are not liable for NICS.
• You have not involvement in the operation of the umbrella company itself, unlike the limited company route. Depending on your own needs, this could be an advantage of using an umbrella scheme too.
• You are reliant on the umbrella company invoicing and receiving funds from clients / agencies in an efficient manner.
• You have no control over your contracting finances, unlike the limited route where you can decide when to draw dividends and how much to pay yourself at any given time. As an umbrella company contractor, you will be paid at pre-agreed intervals.