Why Umbrella Companies Are the best Choice for Contractors in 2025
- Umbrella Search
- 5 days ago
- 6 min read
With an ever-changing landscape, contractors must think carefully about the best way to operate.
Typically, contractors can set up a limited company or use an umbrella company, with both options having pros and cons. While the limited company option was once the go-to choice, thousands of contractors have moved towards the umbrella company route in recent years.
With ever-changing tax laws, with IR35 in particular, the umbrella company option has become the most attractive to many.
In this guide, Umbrella Search further explores why an umbrella company is the best choice for contractors in 2025.
Forget about IR35
One of the significant advantages to contractors working through an umbrella company is that they can forget about IR35. That means no headaches trying to determine if your contract is inside or outside of IR35, and no lengthy, stressful and often costly investigations if you get caught it wrong.
Moreover, thousands of contractors who used to work through their own limited company now find that they are inside IR35, meaning they pay taxes in line with employees, paying more than they need to.
IR35 is complicated and can be challenging to navigate, often resulting in contractors paying higher levels of tax than necessary, and can lead to investigations if you get it wrong. For this reason, many contractors have entirely removed the hassle of IR35 from their lives and opted to use an umbrella company.
This is even more relevant in 2025, with HMRC continuing to crack down on IR35 compliance. This has meant that many clients and companies avoid using these contractors altogether over worries about IR35 classification.
As we've mentioned, an umbrella company removes this hassle altogether. By employing the contractor, all tax deductions, including income tax and National Insurance, are taken care of for you. That means there are no questions over IR35, which is a huge relief to contractors.
Enjoy employee benefits
Another reason many contractors opt to use an umbrella company is due to the fact that they receive employee benefits in return.
When running a limited company, you do not receive benefits like sick pay, holiday pay, or maternity/paternity leave as a self-employed worker. This can be a challenge when you want to take time off for a well-earned break, or fall ill unexpectedly.
When you work through an umbrella company, however, you are entitled to all of these employee benefits, again because the umbrella company employs you.
Get paid on time
One thing that many contractors don’t consider when they step into the world of contracting is that when you use a limited company, you will be responsible for invoicing the client in order to get paid.
Although you can apply payment terms to the invoice, many contractors find that these are not adhered to. Payment terms can depend on the client you’re working with or other delays in cash flow. This can often mean that contractors can face lengthy delays before getting paid, which can seriously impact your personal finances and cashflow, especially if you have things like a mortgage and other financial commitments.
Many contractors, therefore, turn to an umbrella company, which guarantees they will be paid on time each month, fortnight, or week, whichever they prefer.
This is great news for contractors who have to manage their cash flow, especially when working on a number of short-term contractors.
An umbrella company takes on the responsibility of invoicing the client for the contractor, and rather than waiting for the client to pay them, they will always ensure that you are paid what you owe, meaning no more precious time spent chasing late payments or stressing over budgeting.
Need to switch contracts? No problem
We know that the nature of contracting means that contractors move from project to project. A contract can last a year, or you may work on several within that time.
Every contractor is different, but working through an umbrella company will ensure that moving from contract to contract is easy. No need to worry about dealing with IR35 status changes, you continue to remain employed by the umbrella company so you can transition easily between jobs and stay on their payroll.
This will also help when applying for credit, such as a mortgage, as you can show that you have one consistent employment run.
Cost-efficiency of Umbrella Companies
There is a belief that operating through a limited company is the most cost-efficient way of contracting. However, with tightening rules and lockdowns over IR35, this is become less true, particularly for contractors who are inside IR35.
When working through a limited company, contractors will need to pay corporation tax on profits, which stands at 19-25%; they will also pay dividend tax on dividends taken which stands at 8.75-39.35%; they will pay VAT at 20% if their turnover is over £85,000, and will need to pay accountancy fees which often sit at around £2000 per year, as well as insurance costs.
Working through an umbrella company allows you to avoid all these costs. Instead, the contractor will pay income tax in line with current bands, as well as National Insurance.
The contractor will pay the umbrella company a fee, and in return, they will organise the contractor's insurance, taxes, and finances.
For many contractors, this is a worthwhile trade-off for the ease and simplicity that using an umbrella company offers.
Think an umbrella company is the best option for you? We can help
Contractors in their thousands have turned to umbrella companies in recent years.
After all, using an umbrella company takes away IR35 headaches, provides employee benefits, ensures fast payments, easy transitions between contracts, and no administrative or tax headaches while still remaining very competitive.
That’s why umbrella companies are the best choice for contractors in 2025. If you’d like to take the next steps to securing an umbrella company, Umbrella Search is here to help.
Simply get in touch to find out more about how we can find the perfect provider for you.
Frequently Asked Questions (FAQs)
1. What is an umbrella company?
An umbrella company is a payroll intermediary that acts as an employer for contractors working on temporary assignments. The umbrella company handles payroll, tax deductions (PAYE and NIC), and administrative tasks, ensuring compliance with HMRC regulations.
2. Why are umbrella companies beneficial for contractors in 2025?
In 2025, umbrella companies remain a top choice due to:
IR35 compliance – Avoids the complexities of inside IR35 contracts.
Employment benefits – Provides holiday pay, sick pay, and pension contributions.
Simplified admin – The umbrella company handles tax, National Insurance, and payroll, reducing paperwork.
Stable income – Contractors receive a regular salary with statutory rights.
3. Are umbrella companies still relevant in 2025 after recent government changes?
Yes. With ongoing tax legislation and IR35 rules still in place, umbrella companies continue to offer a compliant and hassle-free way for contractors to work. They also provide a secure alternative as HMRC tightens enforcement on tax-avoidance schemes.
4. How do umbrella companies ensure IR35 compliance?
By employing contractors and deducting PAYE tax at source, umbrella companies ensure full compliance with IR35 legislation. This eliminates the risk of penalties or backdated tax bills from HMRC.
5. What deductions are taken from my pay under an umbrella company?
Your pay is subject to:
Income Tax (PAYE) – Based on HMRC tax bands.
Employee National Insurance Contributions (NICs) – Standard rates apply.
Umbrella company margin – A fee for processing payroll and handling admin.
Employer's National Insurance & Workplace Pension – Deducted before your gross pay is calculated.
6. Will I receive employment benefits as a contractor under an umbrella company?
Yes. As an umbrella employee, you are entitled to:
Holiday pay
Statutory Sick Pay (SSP)
Maternity/Paternity pay
Auto-enrolment pension scheme
Continuous employment status
7. How does my pay compare under an umbrella company versus a limited company?
While limited company contractors can take advantage of dividends, they must handle complex tax planning and IR35 assessments. In contrast, umbrella company contractors receive a straightforward PAYE salary with fewer compliance worries. In 2025, many contractors find umbrella companies to be the safer and more convenient option.
8. How do I choose a reliable umbrella company?
Look for:
Transparent fees – No hidden deductions or offshore schemes.
Good reputation – Check reviews and recommendations.
Clear contract terms – Ensure full disclosure of deductions and pay structure.
9. Can I claim expenses when working through an umbrella company?
Due to changes in HMRC rules, most contractors cannot claim travel and subsistence expenses unless they are genuinely working outside IR35. Some umbrella companies offer compliant expense processing for eligible contractors.
10. Are all umbrella companies the same?
No. While all umbrella companies follow PAYE tax rules, their fees, service quality, and benefits can vary. Some offer better customer service, faster payments, or additional benefits like insurance and financial advice. Always compare providers before signing up.
11.Can I switch from a limited company to an umbrella company?
Yes. If you no longer wish to run a limited company, you can transition to an umbrella company. This is common for contractors who want to avoid IR35 risks, simplify their tax situation, or secure employment benefits.
12. What happens if I stop contracting?
If you stop contracting, you can leave the umbrella company without any financial obligations. Your employer status ends, but you can rejoin if you return to contracting in the future.
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