Wednesday , 21 November 2018
Home > Freelance business management > When Should Freelancers Use An Umbrella Company?

When Should Freelancers Use An Umbrella Company?

successful entrepreneurThese days any freelancer, or anyone who is thinking of making the move into freelancing, will need to make a decision as to the type of company structure that they use in order to receive payment from their clients. The contracting sector tends to be split between two types of company structure, the Limited Company and the Umbrella Company. Both have their advantages and disadvantages but in this article we will concentrate on the Umbrella Company structure and what it offers contractors over and above the regular Limited Company formation.

Everyone in business is aware of what the advantages and disadvantages of a Limited Company are. Limited companies allow you a greater rate of take home pay, give you full control over your tax planning and managing your own finances, let you claim all kinds of expenses and allow you to take advantage of the scheme for flat rate. Yet a majority of contractors tend to nevertheless opt for an Umbrella Company set up. Why is that? The two main reasons most often given are that Umbrella Company structures mean that contractors or freelancers (a) don’t have to deal with all the paperwork associated with Limited Companies and (b) don’t have to take on all the responsibilities involved in being a director of a Limited Company. These might seem like strange reasons but think about them for a minute. If you don’t have to worry about being a director then you don’t have to deal with HMRC or Companies house, you will have little or no paperwork to fill out and don’t have to worry about admin – and best of all a decent umbrella provider will have your new business up and running in just a few hours. For many contractors these advantages alone are worth it simply by calculating the amount of hours you could be earning money as opposed to having to spend those hours on administration and paperwork when working through a Limited Company.

Here is the full list of advantages of an umbrella company structure:

Umbrella companies allow you to concentrate on your contracts and earning money. The umbrella company takes care of all the paperwork and administration leaving you to work your contracts.

An umbrella company will handle all of the invoicing, the financial administration, chasing down payments and the processing of your payroll. Your NIC and tax will always be up to date and processed through PAYE.

No need to deal with accountants, fill out VAT forms, company accounts or expenses forms. All of this will be handled by your umbrella company.

Better option in the short term. There is little point in forming a Limited Company if you will only be contracting for four months. An umbrella company is far more cost effective in such situations. Similarly if you are contracting in between jobs.

Umbrella companies often offer benefits to you as you are classed as an employee of their company. These might include everything from life insurance, professional insurance, pension insurance and umbrella expenses to training courses and service guarantees.

You will no longer need to worry about IR35 and your IR35 classification if you are working through an umbrella company.

This last point is one of the most important for contractors. Once you are in an Umbrella Company you can relax and stop having palpitations about being snared by HMRC’s IR35 legislation. You’ll be paying tax and national insurance and handling your affairs in a way that HMRC seems to approve of, with more than 200,000 contractors currently using this form of company structure.

There are of course one or two downsides, from not being able to take advantage of the tax benefits open to Limited Companies to having to pay those NIC’s and also from having to pay fees to the Umbrella Company to being unable to claim specific expenses. You will also have less control of your finances than someone who runs their own Limited Company. That said however, you will have more time on your hands to work, less paperwork to fill out and no tedious dealings with accountants, Companies House and HMRC as well as having a number of benefits you would not get if you worked under a Limited Company. For those contractors on short term contracts and who prefer flexibility and hate paperwork, there really is no other choice!


Photo credit: flatworldsedge via Flickr cc

Want to write for Strat-Talking?

Claim your free templates
Includes: a creative briefing template, an invoice template, a positioning template, a business model template & more!
We hate spam just as much as you

About GregDillon

Greg is the founder of strategy consultancy GD | Inspires and spends his days strategising for various design agencies and clients around the world - see more at He is also a prolific entrepreneur having launched - a website aimed at giving advice and insight to new, existing and veteran freelancers as well as commenting on all things strategic. Feel free to email him at: or follow on Twitter @StratTalking

Leave a Reply

Your email address will not be published. Required fields are marked *


You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>