For contractors, navigating the IR35 legislation and choosing the right way to operate can be challenging.

Many contractors, faced with roles that fall inside IR35, turn to umbrella companies to continue working. However, this is often far from the best solution.

While umbrella companies promise convenience, the reality is they can erode your earnings, reduce financial control, and expose you to unnecessary risks.

If you want to maximise your income, securing an outside IR35 contract and operating through your own limited company remains the best option.

Why umbrella companies aren’t as good as they seem

At first glance, umbrella companies appear to offer a hassle-free way to contract – they handle tax deductions and payroll.

However, the downsides often outweigh any convenience.

Reduced take-home pay

When you work under an umbrella company, you are effectively an employee, but without the benefits of full employment. The umbrella company deducts PAYE tax, employer and employee National Insurance Contributions (NICs), and their own fees before you receive your income.

A contractor operating through an umbrella typically takes home 20–30 per cent less than one working through a limited company in an outside IR35 role. Over a year, this could mean losing tens of thousands of pounds in unnecessary deductions.

Less control over tax planning

Unlike running your own limited company, where you can pay yourself via a mix of salary and dividends to optimise tax efficiency, umbrella companies operate on a strict PAYE model. This means you have no flexibility over how your income is taxed, resulting in higher deductions.

Lack of financial security

Not all umbrella companies are compliant, and many have been caught mismanaging contractor funds or engaging in questionable practices. If an umbrella company collapses, contractors lose unpaid earnings, and in some cases, face liability for unpaid tax and holiday pay.

Why securing an outside IR35 role is the best option

The best way to protect your income and maintain control over your finances is to secure a contract that falls outside IR35.

This allows you to operate through your own limited company, benefiting from:

• Higher take-home pay – Keeping a larger share of your income compared to an umbrella company.
• Tax efficiency – The ability to structure your income using a mix of salary and dividends.
• Control over your business – Retaining decision-making power rather than handing it over to an umbrella.
• Limited liability protection – A safeguard against personal financial risk.

Don’t let an umbrella company hold you back

Umbrella companies limit your earning potential and reduce tax efficiency.

However, if you are serious about maximising your income, securing an outside IR35 role and operating through a limited company is the way forward.