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  3. Why do I need an Umbrella Company?
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  3. Why do I need an Umbrella Company?

Why do I need an Umbrella Company?

Working under an umbrella company is just one option open to contractors, but is popular among those captured by IR35 by offering a cost-effective and fully-compliant way of getting paid on a PAYE basis.


There’s no obligation for contractors to use an umbrella PAYE solution, and many prefer to operate as a limited company (also known as a Personal Services Company) for the tax efficiency it brings. However, if you are permanently IR35 captured, an umbrella company may be the best solution.

From April 2021, changes in the way IR35 is assessed and implemented in the private sector will mean many contractors find themselves partially or permanently captured by IR35. The decision as to whether you are IR35 captured or not falls with your end hirer, and they will provide you with a status determination statement that advises you of this.

If you are captured, then you’ll need to be paid by PAYE according to HMRC rules. If the agency or end hirer (whoever is closest to you in the chain) operates a payroll function, then you can continue as normal. They will deduct PAYE and National Insurance from your net invoice value. You can withdraw the net amount with no further tax implications, as long as you retain funds in the company to pay running costs such as accountancy fees and insurance.

However, if the fee payer doesn’t have the facility to operate a payroll function, then you may need an umbrella solution to take care of PAYE.

If you already operate as a limited company (PSC), then you don’t necessarily need to close it down. You can switch between the two, using your company when non-captured and an umbrella solution when you are. Brookson’s Flex solution offers a cost-effective way of blending both these approaches to contractor’s who are not permanently captured.  

Updated on 23rd March 2020

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