Have you ever seen the phrase ‘umbrella company IR35’ and wondered what it means? If you have, you’ve come to the right place. Umbrella Company UK is a leading UK payroll provider, and we’re proud to be a member of the FCSA. Therefore, you can trust our advice!

If you are inside IR35, using an umbrella company is probably your best option. Please keep reading and find out more, and to identify what the link is between umbrella companies and IR35 legislation.

Limited Company v Umbrella Company

In the UK, there are two main ways that contractors and freelancers operate – working through a limited company (personal service company) or using an umbrella company (PAYE). The best option will depend on the individual workers’ circumstances, and whether their role is inside or outside IR35 legislation.


IR35 legislation was introduced in 2000 to stop disguised employees from taking advantage of tax benefits that they shouldn’t be entitled to. HMRC decided too many contractors were operating through personal service companies when they were actually doing the same jobs as permanent employees.

More information on IR35 is available here.

Inside IR35

If you take an assignment that is inside IR35, you will probably conclude that using an umbrella company is your best option – to maximise your pay retention. However, it’s worth noting that as you won’t be working through a limited company, you won’t be able to pay yourself with a combination of dividends and salary. As a result, your pay retention will be lower than if you outside IR35 and contracting a limited company.

Where a role is inside IR35, you may find that your agency or client gives you a list of umbrella companies that they recommend you use (often referred to as a Preferred Supplier List, or PSL). Not only does outsourcing payroll reduce the workload for their business, but it allows you, the contractor, to opt for a PAYE payroll service that ensures you pay the legal amount of tax – without any associated risks.

If you suddenly find yourself inside IR35 – you are entitled to speak with your client and find out why they came to their conclusion. However, do not under any circumstances be tempted to use a tax avoidance scheme to maximise your pay retention. Doing so could land you in serious trouble with HMRC – either soon or a long way in the future (they can punish you retrospectively).

For more information on spotting tax avoidance schemes, please click here.

Outside IR35

Contractors working outside IR35 are usually able to benefit from operating through a limited company. With careful tax planning, it is possible to legally retain more of their hard-earned money (compared to using an umbrella company) – while continuing to operate in full compliance with HMRC.

Off-Payroll Legislation (IR35)

In April 2017, changes to off-payroll in the public sector (IR35) were introduced that meant contractors were no longer able to determine their IR35 statuses. Instead, this responsibility fell on their end-client. This legislation will be rolling out into the private sector in April 2021.

If you are a contractor or freelancer, off-payroll legislation will impact you soon if it hasn’t already. Therefore, your client must be able to make fair and accurate IR35 assessments for each of their temporary workers. If you suddenly find yourself inside IR35, you may need to ask for an uplift in your rate to avoid a reduction in your pay retention.

Umbrella Company IR35 – Summary

So, to summarise the above – if you are working on an assignment that is inside IR35, you are probably better off using an umbrella company for your payroll. Umbrella companies exist to provide temporary workers with an efficient and compliant PAYE service.

Off-payroll legislation has caused an increase in demand for umbrella companies. However, there are still plenty of roles out there that are advertised as being outside IR35.

More information on who should use an umbrella company is available here.

Need to use an umbrella company?

Inside IR35?

If you are interested in using an umbrella company, or your agency/client has pointed you in our direction – you will be in the safest hands! Umbrella Company UK is relatively new on the scene but we offer a contemporary umbrella service like no other. Firstly – we’re a member of the FCSA – the UK’s leading professional body that is dedicated to ensuring the supply chain of temporary workers is compliant and ethical. Secondly, our priority is providing you with exceptional customer service. Unlike a majority of other providers, we we partnered with My Digital – providers of an innovative umbrella portal and mobile app. All of our clients will have access to My Digital at no additional cost. The My Digital portal allows you to submit your hours worked and view payslips in seconds! Once you have registered with us, you’ll be sent your My Digital login information. The app is available to download for free on the Apple App Store and Google Play.

All of our clients can take advantage of £25 million free insurance, Same Day Faster Payments, Statutory Employee Benefits, no hidden costs – and more!

Get a quick and tailored take home pay calculation

To get a quick and tailored take home pay calculation, please contact us using the form on this page, or give our friendly team a call on 01707 669 023.

This page ‘Umbrella Company IR35’ has been written to provide you with useful information about umbrella companies and who is best suited to them for their payroll. If you still have unanswered questions, please do not hesitate to get in contact with our friendly team! Please send your query via the form on this page, or call us on 01707 669 023.

Contact Us Today!

Interested in finding out more about umbrella companies and how Umbrella Company UK can help you with your payroll? Please contact us using the form below, or call 01707 669 023.

Our friendly team would be delighted to provide you with a quick and tailored take home pay projection, explain the processes involved, or answer any outstanding questions you may have.

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