Should You Use an Umbrella Company? Costs, Benefits & Comparison

You're inside IR35. Your take-home pay has dropped by thousands, you're dealing with PAYE administration through your limited company, and you're wondering if there's a simpler way. Someone mentions umbrella companies. They handle all the tax, all the admin, all the complexity. You just invoice them and receive a net salary. Sounds appealing. But umbrella companies charge for this service, typically £100-150 per week or 2-3% of your contract value. Is that margin worth paying? Does using an umbrella actually simplify your life, or does it create new problems?

For some contractors, umbrellas make perfect sense. For others, they're an expensive solution to a problem that doesn't really exist. Understanding exactly how umbrella companies work, what they cost, and when they're the right choice matters before you make the switch.

What Umbrella Companies Actually Are

An umbrella company is an intermediary employer. You become their employee. They invoice your agency or client. When they receive payment, they pay you a salary through PAYE after deducting tax, National Insurance, their margin, and any other costs.

You're not running your own business anymore. You're an employee of the umbrella, working on assignments that you find. The umbrella provides the employment infrastructure—payroll, tax compliance, employment contracts, insurance.

This is fundamentally different from operating through your own limited company. With your own company, you're the director and shareholder. You control everything. With an umbrella, you're giving up that control in exchange for simplicity.

The basic umbrella process

You complete an assignment through an agency or directly with a client. You submit your timesheet to the umbrella company. The umbrella invoices the agency or client for your work. They receive payment. They calculate your gross pay based on hours worked and agreed rate. They deduct PAYE tax, employee's National Insurance, employer's National Insurance, pension contributions if applicable, and their margin. They pay you the net amount. They handle all reporting to HMRC.

From your perspective, you're receiving a salary like any employee. From the client or agency's perspective, they're paying a business for services.

How Umbrella Costs Work

Umbrella companies charge in different ways. Understanding the real cost matters because it directly affects your take-home pay.

Fixed weekly or monthly fees

Many umbrellas charge a flat fee per week, typically £100-150, or per month around £400-600. This comes off your gross pay before calculating tax. It's a business expense for the umbrella, not something you pay from net income.

On a £500 day rate working full-time, £120 per week is roughly £6,240 per year. That's not trivial.

Percentage-based fees

Some umbrellas charge a percentage of your contract value, usually 2-3%. On a £110,000 annual contract, 2.5% is £2,750. Less than the weekly fee model in this example, but it scales with your income.

Higher earners often find percentage models cheaper. Lower earners might prefer fixed fees if the percentage works out higher.

Employer's National Insurance

This isn't strictly an umbrella fee, but it affects your take-home the same way. When you work through an umbrella, they pay employer's National Insurance at 13.8% on your gross pay above the threshold.

This comes from your contract income before your gross pay is calculated. It's not money the umbrella keeps, but it does reduce what reaches you.

With your own limited company inside IR35, you pay employer's NI too. So this isn't an additional umbrella cost, but it's worth understanding where the money goes.

Other costs

Some umbrellas charge for services like insurance, professional memberships, or pension administration. These should be clearly disclosed upfront. If they're not, that's a red flag.

Holiday pay usually comes from your own earnings. Umbrellas typically withhold 12.07% of your gross pay to fund your holiday entitlement. You're not paying extra for this, but you receive less each week, then get a lump sum when you take holiday.

Take-Home Pay: Umbrella vs Limited Company Inside IR35

The crucial question for most contractors is how much you actually receive. Here's a realistic comparison.

Scenario: £500 day rate, 220 days per year, £110,000 total

Through your own limited company inside IR35:

Contract income: £110,000
Less 5% deemed payment allowance: £5,500
Less employer's NI (13.8% on £100,900): £12,650
Deemed payment subject to PAYE: £91,850
Less Income Tax: £21,856
Less employee's NI: £5,997
Net take-home: approximately £64,000

Through an umbrella company:

Contract income: £110,000
Less umbrella margin (£120/week × 52): £6,240
Less employer's NI (13.8% on £103,760): £13,063
Gross salary: £90,697
Less Income Tax: £21,501
Less employee's NI: £5,888
Net take-home: approximately £63,300

The difference is around £700-1,000 per year. You're paying slightly more to use an umbrella, but not dramatically more.

Lower rates

At £300 day rate (£66,000 annually), the gap widens. Your limited company would give you around £45,000 take-home. An umbrella would give you around £43,000. The fixed umbrella margin represents a larger percentage of your income, so it hurts more.

Higher rates

At £700 day rate (£154,000 annually), the gap narrows proportionally. Limited company gives you around £93,000. Umbrella gives you around £91,000. The margin is the same absolute amount but smaller percentage of your income.

When Umbrella Companies Make Sense

Umbrellas aren't right for everyone, but they solve real problems for certain contractors.

You're inside IR35 long-term

If you're going to be inside IR35 for the foreseeable future across multiple contracts, running your own limited company loses most of its advantages. You're not taking dividends. You're operating PAYE anyway. You're still paying accountancy fees.

An umbrella eliminates your accountancy costs (typically £1,000-2,000 per year), your company formation and filing requirements, and all the administrative burden. The umbrella margin might be similar to what you'd pay accountants anyway.

You're moving between multiple inside IR35 contracts

If you're doing several short contracts per year, all inside IR35, umbrellas provide consistency. You're employed by the umbrella throughout. When you change contracts, nothing changes from a tax perspective.

Managing your own limited company with constantly changing inside IR35 contracts means adjusting payroll every time you start or stop work. Umbrellas handle this automatically.

You want to avoid compliance risk

Running PAYE through your own limited company means you're responsible for getting it right. RTI submissions, tax codes, payments to HMRC, year-end filings. Get any of it wrong and you face penalties.

Umbrellas take on this compliance risk. They're experts in PAYE and employment tax. If mistakes happen, they're responsible, not you.

Your agency mandates umbrella use

Many agencies now refuse to work with limited companies, requiring all contractors to use umbrellas. If the contracts you want are only available through these agencies, you don't have much choice.

You could push back and try to negotiate limited company terms, but agencies are increasingly inflexible on this. Using their preferred umbrella might be the only way to access the work.

You have outside IR35 work elsewhere and one inside contract

This seems counterintuitive, but if you have other genuine outside IR35 contracts and one awkward inside arrangement, using an umbrella for just the inside work can be cleaner than complicating your limited company's accounting with mixed status.

Your limited company continues as normal for outside work. The inside work goes through an umbrella completely separately. Clean separation, no mixing of different tax treatments.