If you utter the words ‘IR35’ and ‘umbrellas companies’ in the presence of a Contractor, and/or a business owner who employs them, you’re quite likely to see both of them bolt for the nearest exit.

This is due to the lasting trauma they experienced when dealing with the old rules for IR35 and umbrella companies. If you were not privy to the years of absolute tax administration chaos and carnage that unfolded as a result, count yourself lucky! 

Previously Contractors had to decide their own IR35 status, which caused uncertainty, mistakes, and even deliberate misclassification. Plus, the inconsistency of the old rules made it difficult for genuinely independent Contractors to prove they were outside IR35, while giving HMRC room to challenge them years later.

Thankfully the rules have recently been clarified, simplified and updated. However, many Contractors still don’t understand how the IR35 umbrella company setup affects them, and what it means for take-home pay and compliance.

If this is you, it’s time to get fully clued up on the subject. Crunch’s accountants are experts on all things IR35, so let’s do that right now.

What is IR35?

IR35 is a set of tax rules designed to stop “disguised employment.” Essentially, that’s when someone works like an employee but bills through their own Limited Company to pay less tax.

If you’re inside IR35, HMRC sees you as effectively an employee, so you’ll pay Income Tax and National Insurance like one. If you’re outside IR35, you’re genuinely in business on your own, with the freedom (and tax benefits) that come with it.

The problem with the original IR35 rules was that Contractors had to figure out their own status, which often led to confusion and disputes. That’s why recent reforms shifted the responsibility to clients (in most cases), but the rules still matter to every Contractor thinking about how they work.

IR35: a quick refresher timeline

To understand why IR35 can feel so confusing, it helps to see how the rules have evolved over time. 

Here’s a quick timeline of the key changes:

- Pre-2000s: IR35 introduced, Contractors decide their status
- 2017/2018 reforms: Responsibility for determining IR35 status shifts to medium and large clients
- Recent updates: Clearer guidance for small businesses and simplification of penalties

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What is an umbrella company?

An umbrella company is basically a middleman that employs you and runs your pay through PAYE (Pay As You Earn). Instead of setting up your own Limited Company, you become an employee of the umbrella. They handle all the annoying details, like tax, National Insurance, and payroll, and then pay you a salary after deductions.

Umbrella companies are popular with Contractors who don’t want the hassle of running a company, or for those caught inside IR35 who need a simple, compliant way of working. You’ll usually pay the umbrella a small fee for handling everything, and in return you get employee-style perks like holiday pay, statutory sick pay, and pension contributions.

How does IR35 apply when using an umbrella company?

You’ll be pleased to hear that if you’re working through an umbrella company, IR35 doesn’t really apply. That’s because you’re officially employed by the umbrella, and all your tax and National Insurance is already taken care of through PAYE.

In other words, there’s no risk of being “caught” by IR35 when you’re with an umbrella company, the rules are designed for Limited Company Contractors, not employees.

That said, many Contractors get tripped up by this. They assume an umbrella company is some kind of clever IR35 workaround, when in reality it’s just a completely different way of working. You’re not sidestepping the rules, you’re stepping into a standard employment setup with the umbrella as your employer.

Pros and cons of using an umbrella company in relation to IR35

Like most things in contracting, umbrella companies have their upsides and downsides, especially when you look at them through the lens of IR35.

Quick take-home pay comparison

Here’s a simplified example to show how your earnings might differ:

*These numbers are illustrative and should be used as a guide only. Always consult with an accountant, as actual take-home pay will depend on your individual circumstances and contract.

For a more personalised view, try our free take-home pay calculator. It gives you estimated earnings across different scenarios: Sole Trader, Limited Company, or Umbrella. So you can get an idea of what might work best for you and your situation. 

What Contractors should consider

Choosing between an umbrella company and running your own Limited Company often comes down to your IR35 status and what matters most to you.

• If your contract is outside IR35, a Limited Company can still be the most tax-efficient option.
  
  
• If you’re inside IR35, an umbrella company might be the simplest, stress-free way to stay compliant.

It’s also worth weighing up things like your expected take-home pay, whether employee benefits are important to you, and how much admin you’re willing to deal with.

At the end of the day, there’s no one-size-fits-all answer.  The “best” choice depends on your contracts, your long-term plans, and your personal priorities. That’s why speaking to an accountant (like us!) can save you a lot of headaches and help you pick the setup that works for you.

Pro tip: Not all umbrella companies are created equal. Look for HMRC registration, transparent fees, and proper employee benefits. Avoid “too-good-to-be-true” arrangements, they often create more problems than they solve.

IR35 and umbrella companies - making the right choice

IR35 and umbrella companies are never going to be the most straightforward tax concept to understand. But the key thing to remember is that if you’re working through an umbrella company, IR35 doesn’t apply in the same way. You’re an employee, so PAYE takes care of your tax and compliance automatically.

That doesn’t mean umbrellas are the right answer for everyone. If you’re outside IR35, running your own Limited Company could still give you more flexibility and a better take-home. If you’re inside IR35, an umbrella company might be the simplest way to keep things compliant and stress-free.

Either way, it pays to get the right advice before deciding. If you’re weighing up your IR35 umbrella company options, we’re here to help you cut through the jargon and find the setup that makes the most sense for you.