How to Decode Umbrella Companies?
Decoding Umbrella Companies: Understanding Fees, Pros, and Cons for Contractors
If you’ve been contracting for a while - or, if you’ve been looking into how to approach being a contractor - you will probably have come across umbrella companies. There’s been a lot of talk about umbrella companies in recent years, especially when it comes to the tax differences between working as a self-employed freelancer or being classed as an employee under an umbrella company. This has led to a lot of contractors wondering if an umbrella company is right for them, and views are mixed.
At Go Limited, our experts know all there is to know about umbrella companies, and we can help you to determine if working under one is beneficial for your business. In this blog, we’ve taken a look at the pros and cons of umbrella companies, the fees involved and how working with an umbrella company differs from setting up a limited company.
What is an Umbrella Company?
To know whether an umbrella company is right for you, you need to understand what an umbrella company is and how working with one could impact your contracting. An umbrella company is a company that provides a service to contractors, acting as the ‘middleman’ between you and your clients. The company employs you, the contractor, and manages all administrative tasks related to payroll, taxes, National Insurance and compliance. This provides you with a streamlined way for you to receive wages for your work, without needing to set up and manage your own limited company and work involved in that.
When you work through an umbrella company, you become an employee of that company, and you’re treated as such for tax purposes. This means that you are no longer a self-employed professional. This removes the need for you to handle complex tax calculations or file a self-assessment tax return related to your contracting income, as the umbrella company handles everything for you.
Umbrella Company vs. Limited Company: What’s the Difference?
There’s a range of ways to approach running a business, including using an umbrella company or setting up as a limited company. Though these are both companies, there are some key differences between the two, which is why it’s important to compare an umbrella and limited company before deciding which path is right for you.
Umbrella Company
When you’re working under an umbrella company, the company acts in a similar way to an employer. The umbrella company handles your payments, tax deductions via PAYE and your National Insurance contributions (NICs) so you don’t have to. Usually, you’ll submit timesheets or specific tasks, and then you’re paid once taxes and fees have been deducted.
Limited Company
If you choose to contract through a limited company, you become the director of your own company. When you work via a limited company, you send clients an invoice at agreed milestones, and they pay your company. You then use these profits to pay yourself, usually as a combination of salary and dividends, and manage your own tax responsibilities. Contracting through a limited company offers more flexibility and it can be more cost-effective in terms of tax, but it does require additional responsibility on your part.
Compare an Umbrella and Limited Company: Key Things to Know
One of the benefits of choosing the limited company route is that it often allows for higher take-home pay by reducing your tax liabilities and increasing your allowable expenses. But, this does require a lot more administration from you, and working under an umbrella company tends to be simpler.
When you work under an umbrella company, you can enjoy simplified paperwork, administration and fewer responsibilities. You can complete the work and wait for payment to reach your bank account, knowing that someone else is taking care of bookkeeping, tax and NICs.
When you set up a limited company, you have a lot more control over the work you do and the money you take home. But, this is only the case if you put the effort in, and it only pays off if you’re making a significant profit. On the other hand, umbrella companies are ideal for short-term or less lucrative contracts.
The Pros and Cons of Working for Under an Umbrella Company
There are a number of benefits that come with working under an umbrella company, which is why it’s a route that a lot of contractors take. Whether you’re providing professional consulting services or labour, graphic design or freelance writing, an umbrella company is worth considering. For example, there are minimal administrative responsibilities when you work with an umbrella company, as the umbrella company handles your tax and income.
You also don’t need to worry about IR35 as you’re classified as an employee, so there’s no worry of you paying tax as a self-employed worker if you’re not. You can sit back and relax, knowing that the umbrella company is taking care of everything to do with your income, expenses, tax and NICs. There’s also the benefit that umbrella companies provide a lot of flexibility, making them good for short-term contractors or when you’re in between roles.
Downsides of Working Under an Umbrella Company
As is the case with any approach to business, there are some disadvantages of using an umbrella company. You’re likely to find that your take-home pay is lower when you work under an umbrella company, compared to if you set up a limited company. This is because PAYE pays you in a salary, without any divides or expenses, both of which can reduce your tax liability. One drawback of umbrella companies is their service fees, which can decrease your earnings.
Understanding Umbrella Company Fees and Implications
Understanding the fees associated with working for an umbrella company is crucial; otherwise, you may encounter unexpected costs. Umbrella companies charge a service fee for handling your payroll and tax deductions, saving you the trouble of doing it yourself. This can save you a lot of time, which is why a lot of contractors see the fee as a small price to pay for an easier financial life. These fees are usually charged as a flat weekly or monthly amount, or as a percentage of your income.
If you choose to work with an umbrella company, you need to know exactly what you’re going to be paying, and this can differ from one company to the next. Some umbrella companies charge fixed fees for their service, making it easier for you to predict and budget for, regardless of your earnings. But, otherwise work on a percentage basis. This means that the fees increase as your income rises, which can reduce high earnings significantly. It’s also not uncommon to come across additional costs when you’re working with an umbrella company - for example, for processing any expenses you might have or for providing replacement payslips - and these can quickly add up.
Simplifying Expenses for an Umbrella Company
There are a lot of reasons to become a contractor, one of which is being able to deduct allowable expenses from your earnings. But, this can be complicated if you’re working under an umbrella company. When you have a limited company, you can claim a whole host of expenses, but expense claims under an umbrella company are limited due to PAYE rules. Usually, you can only claim expenses that are reimbursed by the client, such as travel or subsistence directly related to the contract that you’re working on. It’s important that you know the HMRC rules on allowable expenses for umbrella company contractors to avoid making a mistake.
Does Take-Home Pay Change Umbrella vs. Limited Company?
Yes, your take-home pay can change depending on whether you operate through an umbrella company or a limited company. Due to PAYE deductions, NICs and umbrella company fees, you’re likely to be left with a smaller percentage of your earnings as take-home pay, compared to working with a limited company. This lower percentage reflects the simplicity and compliance benefits that working with an umbrella company has. After taking corporation tax, dividends and allowable expenses into account, contractors working with a limited company retain a lot more of their income.
At Go Limited, we know that you’re faced with a lot of options when it comes to conducting business, including working with an umbrella company. Knowing whether an umbrella company is right for you isn’t always easy, especially when you also have setting up a limited company as an option. There are pros and cons to both, and the right approach for you will depend on your business type, earnings and type of work. Our experts are here to help you out with umbrella companies and limited companies, regardless of how you choose to approach running your business.
FAQ: Umbrella Companies in 2025
1. How are umbrella companies expected to evolve by 2025?
By 2025, umbrella companies in the UK will likely face stricter compliance checks, new government regulations, and possibly mandatory accreditation.
These changes aim to:
- Improve worker protection
- Ensure transparent payroll practices
- Reduce tax avoidance schemes
While this could enhance fairness, contractors may face higher fees and lower take-home pay, especially if earning £50,000+ per year.Go Limited offers contractor-specific guidance on whether to stay umbrella or go limited in 2025.
2. How might the Labour government impact umbrella companies?
Labour is expected to:
- Crack down on non-compliant umbrella providers
- Enforce better holiday pay and pension contributions
- Reassess employment status, which could reclassify some contractors as full employees
These reforms aim to improve protections but may also shift how umbrella companies operate. Go Limited monitors policy changes to keep contractors compliant and informed.
3. Will umbrella companies raise their fees in 2025?
Yes, umbrella company fees may increase as:
- Operational and compliance costs rise
- Regulatory demands expand
Contractors may see reduced net pay, but competition could drive better service transparency and value. We help Go Limited users compare umbrella and limited company earnings based on real cost projections.
4. Will umbrella companies still be a good option for contractors in 2025?
Umbrella companies remain ideal for:
- Inside IR35 contracts
- Short-term or occasional contracting
- Contractors who want minimal admin
However, for high earners or long-term contractors, limited companies may offer better tax efficiency under the 2025 regulatory outlook. Go Limited helps you decide when it’s time to go limited – or when to stay umbrella.
5. Umbrella vs. Limited Company – which is better in 2025?
Umbrella:
- PAYE taxed income
- Employee benefits (e.g., holiday pay)
- No need to run a business
Limited Company:
- Higher take-home pay potential
- More control over finances
- Tax planning flexibility
In 2025, contractors outside IR35 and earning £35,000+ may benefit more from a limited structure. Go Limited offers a free comparison tool to help you choose the right setup based on your contracts.
6. How can I ensure I’m using a compliant umbrella company?
To stay safe in 2025:
- Choose FCSA-accredited umbrella companies
- Avoid any provider promising 90%+ take-home pay
- Look for full transparency on deductions and fees
7. Can umbrella workers still claim expenses in 2025?
Only in very limited circumstances. Due to HMRC’s Supervision, Direction or Control (SDC) rules:
- Travel and subsistence claims are generally not allowed
- Expenses can only be claimed if you're proven to work outside SDC
Future Labour reforms may further restrict tax relief on expenses. Go Limited helps you determine if your contract qualifies for allowable claims.
8. What if my umbrella company turns out to be non-compliant?
You could face:
- HMRC penalties or unexpected tax bills
- Loss of income from illegal deductions
- Risk of being tied to a disguised remuneration scheme
Always check credentials before signing up. Go Limited audits umbrella schemes and warns users of compliance red flags.
9. What are the benefits of using an umbrella company in 2025?
- Hassle-free payroll (tax and NI handled for you)
- Employee rights (holiday/sick pay, pension contributions)
- Protection for inside IR35 contracts
- No admin or company setup required
10. What are the risks of umbrella companies in 2025?
- Hidden fees that reduce your take-home
- Less control than limited companies
- Stricter tax rules reducing expense claims
- Possible government reform exposure
11. How does IR35 affect umbrella workers?
If your role is inside IR35, using an umbrella company ensures:
- PAYE compliance
- No need to manage IR35 tax calculations yourself
But you'll sacrifice tax efficiency available through a limited company. Go Limited offers IR35 contract reviews and switching options.
12. Will IR35 rules change in 2025?
Labour is likely to:
- Strengthen IR35 enforcement
- Increase compliance obligations for businesses hiring contractors
This could limit limited company opportunities, forcing more workers under umbrella payroll. Our team keeps you up to date and helps you stay ahead of IR35 changes.
13. Will umbrella companies still be legal in 2025?
Yes. Umbrella companies will remain legal and regulated, but:
- Non-compliant providers may be forced to close
- New licensing or accreditation rules may apply
14. Where can I get expert advice on umbrella companies in 2025?
For the most reliable information:
- Monitor updates from HMRC and the FCSA
- Speak with an accountant who specialises in contracting
- Use tools and calculators from services like Go Limited
This article explains what umbrella companies are and how they compare to limited companies for UK contractors. It breaks down the fees, advantages, and drawbacks of umbrella company employment—including how it affects take-home pay, expense claims, and tax responsibilities—so you can decide which structure works best for your contracting career.
Please note: Any rates and thresholds mentioned in this article are correct at the time of publishing and may be subject to change.
