Alternatives to using an Umbrella Company

You don't have to use an umbrella company when you are contracting, check out Introduction to an Umbrella Company to see if they'd be any good for you. What you do need is 'limited company' status. There are alternatives which you can consider.

Agency PAYE

This is a popular alternative for some. In this instance, you would become an employee of your recruitment agency, and the recruitment agency would become your 'limited company'.

The contractor is not permitted to claim any business expenses, and their entire salary is subject to income tax & National Insurance.

Comparatively, the umbrella company service returns a higher net pay amount after all deductions  - even after their fee is deducted. Get an idea of how much you should pay for an umbrella company.

This alternative to using an umbrella company, referred to as 'going agency PAYE', may be preferable if your contract is just for a day or two. However, for many recruitment agencies the hassle & administration burden this involves means it's usually just not worth their while to provide such a service to their contractors.

• The recruitment agency is likely to suggest the contractor use an umbrella company service.

Running your own Limited Company

Setting up & running your own one-man limited company means you become liable & responsible for the correct administration of the business - in addition to fulfilling your contract on a daily basis.

You will be a director, with obligations & responsibilities for the legal compliance of the limited company. There are many detailed and intricate laws to understand across a wide range of disciplines. Appointing an accountant is necessary and this and other costs must be taken into account.

Legislation affecting Contractors

An umbrella company (click here if you are new to umbrella companies) acts as employer to independent contractors who work under temporary contract, usually through a specialist recruitment agency.

Recruitment agencies will only issue contracts to a limited company and since the introduction of the MSC (Managed Service Company) legislation in 2007, the only way a contractor can comply with this requirement is to set up their own personal limited company or to use an umbrella company.

IR35 makes it less beneficial for contractors to setup their own limited company and relatively more attractive to join an umbrella company.

 1. What is contracting and how can I become a contractor?
 2. You've got the contract, what now?
 3. What is an umbrella company?
 4. Umbrella company myths
 5. Umbrella company FAQs
 6. Umbrella company paperwork
 7. Umbrella company expenses
 8. Calling an umbrella company
 9. 10 questions to ask your umbrella company
10. IR35
11. Paying Employer's National Insurance
12. Choosing an umbrella company
13. Umbrella company alternatives