Summary
Most UK tradespeople work as CIS sole traders, but two other routes come up regularly. Labour agencies on large sites, fit-out firms and public-sector frameworks often insist on an umbrella company. Experienced trades with steady contract work look at forming a limited company. The choice affects take-home pay, holiday and sick pay, pension, the paperwork, and who carries the risk if HMRC decides the arrangement is really employment.
The common misconception is that an umbrella "only costs £20 a week". The margin is the visible fee, but the bigger deduction is employer's National Insurance and the Apprenticeship Levy. These are taken out of the assignment rate before your gross salary is calculated. Since employer NI rose to 15% and its threshold fell to £5,000 in April 2025, umbrella take-home has fallen noticeably.
The opposite misconception is that a limited company is always better. A limited company only beats an umbrella when the engagement is outside IR35. If a medium or large end client decides the role is inside IR35 (off-payroll working rules, since April 2021 in the private sector), the fee is taxed much like employment and the limited company adds cost without saving tax. Many agencies then push the worker into an umbrella anyway.
Key Facts
- Umbrella company — an employer that contracts with the agency, employs you on a contract of employment, and pays you through PAYE. You are an employee, so you get statutory holiday pay, Statutory Sick Pay and auto-enrolment pension.
- Assignment rate — the rate the agency pays the umbrella (for example £250/day). It is not your gross salary.
- Employer NI — 15% on earnings above the secondary threshold of £5,000/year (from 6 April 2025). This comes out of the assignment rate.
- Apprenticeship Levy — 0.5% of pay bill. Umbrellas exceed the £3m levy threshold, so it is usually deducted from the assignment rate.
- Umbrella margin — typically about £15–£35 per week, or a percentage. Check whether it is charged per week, per timesheet or per assignment.
- Holiday pay — 5.6 weeks' statutory entitlement. Irregular-hours workers can have it rolled up at 12.07% of pay from leave years starting on or after 1 April 2024.
- Agency PAYE liability — from 6 April 2026 the agency supplying the worker (or the end client if there is no agency) becomes responsible for PAYE where an umbrella is used. This targets non-compliant umbrellas.
- Limited company Corporation Tax — 19% small profits rate up to £50,000 profit, 25% main rate above £250,000, with marginal relief in between.
- Dividend tax 2026/27 — £500 dividend allowance; ordinary rate 10.75% and upper rate 35.75% from 6 April 2026 (each up 2 points); additional rate 39.35%.
- Director salary — commonly set at the £12,570 personal allowance. A sole director with no other employees cannot claim the £10,500 Employment Allowance.
- IR35 / off-payroll — medium and large private-sector clients decide employment status and issue a Status Determination Statement. Small clients leave the decision to the worker's company.
- CIS — a limited company doing construction work for a contractor is a CIS subcontractor: 20% deduction (registered), 30% (unregistered) or gross payment status if it passes the turnover test (£30,000 per director or £100,000 for the company).
- VAT — compulsory registration at £90,000 taxable turnover (rolling 12 months). Umbrella employees never register for VAT.
- Mini umbrella company (MUC) fraud — HMRC warns about schemes that split workers across hundreds of tiny companies to abuse the Employment Allowance and VAT flat rate. If payslips come from an unfamiliar company each month, stop and check.
Quick Reference Table
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Try squote free →| Factor | Umbrella company | Limited company (outside IR35) | Limited company (inside IR35) |
|---|---|---|---|
| Employment status | Employee of umbrella | Director/shareholder of own company | Deemed employment for that contract |
| Who runs payroll | Umbrella | You or your accountant | Fee-payer (agency/client) deducts PAYE |
| Employer NI comes from | Your assignment rate | Your company (on salary only) | Fee-payer, not taken from your rate (by law) |
| Holiday / sick pay | Statutory entitlement | None unless you budget for it | None |
| Expenses relief | Very limited (supervision, direction or control rule) | Wholly and exclusively business costs | Very limited |
| Typical admin | Timesheets only | Accounts, CT600, confirmation statement, payroll, self assessment | As outside, plus less benefit |
| Typical cost | £15–£35/week margin | £1,000–£2,500/yr accountancy | Same cost, little tax saving |
| CIS deductions | No (PAYE employee) | Yes, unless gross payment status | Usually no; PAYE applies to the deemed payment |
| VAT registration | Never | Compulsory over £90,000 | Possible, but domestic reverse charge often applies |
| Take-home on £250/day (illustrative) | ~£39,300 | ~£42,500 | ~£39,000–£40,000 |
Detailed Guidance
How an umbrella payslip is built
Most disputes with umbrellas come from not understanding the "funds received" calculation. The umbrella receives the assignment rate and takes these deductions in order:
- Umbrella margin — its fee.
- Employer's NI — 15% above £5,000 a year (£96/week).
- Apprenticeship Levy — 0.5%.
- Employer pension contribution — minimum 3% of qualifying earnings under auto-enrolment, unless you opt out.
What is left is your gross pay. Income tax, employee NI (8% between £12,570 and £50,270, 2% above) and your own pension contribution then come off as for any employee. Holiday pay is either rolled up into each payslip at 12.07% or accrued.
Ask the agency for a Key Information Document (KID). Under the Conduct of Employment Agencies Regulations 2003 (as amended in 2020) it must show an example take-home figure and every deduction, including the umbrella margin.
Worked comparison at £250/day
Assumptions: £250/day, 5 days × 46 weeks = £57,500 a year. England, 2026/27 rates. No pension. This simplified illustration excludes student loans and the High Income Child Benefit Charge; it is not advice.
Umbrella
| Step | Calculation | Amount |
|---|---|---|
| Assignment income | 230 days × £250 | £57,500 |
| Less margin | £20 × 46 weeks | −£920 |
| Employment cost available | £56,580 | |
| Gross salary (S) | S + 15%(S − £5,000) + 0.5%S = £56,580 | £49,636 |
| Income tax | 20% × (£49,636 − £12,570) | −£7,413 |
| Employee NI | 8% × (£49,636 − £12,570) | −£2,965 |
| Take-home | ≈ £39,258 |
Limited company, outside IR35
| Step | Calculation | Amount |
|---|---|---|
| Turnover | £57,500 | |
| Accountant, insurance, software | −£2,500 | |
| Director salary | −£12,570 | |
| Employer NI on salary | 15% × (£12,570 − £5,000) | −£1,136 |
| Profit before tax | £41,294 | |
| Corporation Tax | 19% | −£7,846 |
| Available for dividends | £33,448 | |
| Dividend tax | 10.75% × (£33,448 − £500) | −£3,542 |
| Take-home (salary + net dividends) | £12,570 + £33,448 − £3,542 | ≈ £42,476 |
The gap is about £3,200 a year. It shrinks once you count the admin time, the loss of holiday and sick pay, and any cash left in the company for quiet months. On the old pre-2022 rates the gap was much wider, so many trades who formed companies years ago now find the benefit marginal.
When a limited company makes sense for a tradesperson
A limited company tends to be worth it when:
- You work directly for homeowners or small clients, so IR35 is not decided against you by a large end client.
- Profits regularly exceed what you need to live on, so you can leave profit in the company at 19% rather than drawing it at 40% personal rates.
- You employ people (unlocking the £10,500 Employment Allowance) or buy expensive kit, vans or premises.
- You want limited liability and a more credible image for commercial tenders. Personal guarantees on loans and supplier accounts still undo much of that protection.
See sole trader vs limited company for the sole trader comparison. For most domestic trades, a sole trader is the simplest starting point.
When an umbrella is the realistic option
An umbrella is usually the practical (or only) option when:
- A large main contractor or public body has decided the role is inside IR35 and the agency will only pay via umbrella or its own PAYE.
- The work is short-term agency labour and you don't want year-end accounts.
- You value statutory holiday pay, SSP and continuity of employment, which can matter for mortgages.
Check the umbrella against HMRC's guidance on working through an umbrella company. Look for membership of a compliance scheme (FCSA or Professional Passport) and confirm payslips show tax and NI deducted. "Too good to be true" take-home illustrations, loan or "advance" payments, or retention bonuses usually mean a disguised remuneration scheme, and the tax bill comes back to you.
IR35 for trades: the practical tests
HMRC's Check Employment Status for Tax (CEST) tool and case law look at:
- Substitution — can your company genuinely send someone else, and has it done so?
- Control — does the client tell you how, when and where to work beyond normal site rules?
- Mutuality of obligation — is the client obliged to offer work and you to accept it?
- Financial risk — do you price jobs, fix defects at your own cost, and supply significant equipment?
- Part and parcel — do you appear on the client's org chart, wear their uniform as staff, or manage their employees?
A fixed-price quote to build a garden wall for a homeowner is clearly a business-to-business (or business-to-consumer) supply. A day rate on a contractor's site under their supervisor's direction for six months looks much more like employment.
Switching between routes
- Umbrella → limited company: incorporate at Companies House (£50 online), register for Corporation Tax within 3 months of starting to trade, register for CIS as a subcontractor, set up payroll and open a business account. Tell your agency and get any Status Determination Statement in writing.
- Limited company → umbrella: you can keep the company dormant (filing dormant accounts) or close it by striking off (DS01). Leaving retained profits in a company you intend to close can create Members' Voluntary Liquidation and Targeted Anti-Avoidance Rule issues, so take accountancy advice.
Frequently Asked Questions
Is the umbrella margin the only thing I'm paying for?
No. The margin is the umbrella's fee, but employer NI (15% above £5,000), the Apprenticeship Levy (0.5%) and the employer pension contribution all come out of the assignment rate too. Those employer costs are usually 10–13 times larger than the margin. Always compare umbrellas on the net take-home figure in the Key Information Document, not on the margin alone.
Can I claim travel and tool expenses through an umbrella?
Rarely. Since April 2016, travel and subsistence relief is blocked for workers under supervision, direction or control through an intermediary, which covers nearly all umbrella employees. Tools you must provide may be claimable as a self assessment employment expense, but umbrellas that promise large tax-free expense allowances are a red flag.
Do I still need CIS registration if I use an umbrella?
No. As an umbrella employee you are paid through PAYE, so CIS does not apply to your pay. If you also do private work on the side as a sole trader, that side business is separate and may need CIS registration if you subcontract to contractors.
Who pays if my umbrella company doesn't pay my tax?
From April 2026, the agency (or end client) supplying you is responsible for PAYE where an umbrella is used. Before that, HMRC pursued the umbrella and, for disguised remuneration, the worker. Keep every payslip and P60 and check your personal tax account to confirm the tax shown on your payslips actually reached HMRC.
Does a limited company protect my house if a job goes wrong?
Only partly. The company is liable for its contracts, but directors often personally guarantee bank loans, van finance and merchant credit accounts. You can still be personally liable for negligence causing injury, or for wrongful trading. Public liability insurance matters more than the company structure: see public liability insurance guide.
Regulations & Standards
Income Tax (Earnings and Pensions) Act 2003, Part 2 Chapters 8 and 10 — intermediaries legislation (IR35) and off-payroll working rules
Social Security Contributions and Benefits Act 1992 — Class 1 National Insurance for employers and employees
Finance Act 2004, Part 3 Chapter 3 and Income Tax (Construction Industry Scheme) Regulations 2005 (SI 2005/2045) — CIS deductions and gross payment status
Corporation Tax Act 2010 — small profits rate and marginal relief
Conduct of Employment Agencies and Employment Businesses Regulations 2003 (SI 2003/3319) — Key Information Document requirement (inserted 2019, in force April 2020)
Working Time Regulations 1998 (SI 1998/1833) — 5.6 weeks' holiday and 12.07% rolled-up holiday pay for irregular-hours workers
Pensions Act 2008 — automatic enrolment duties for umbrella employers
Companies Act 2006 — incorporation, directors' duties, annual accounts and confirmation statement
Value Added Tax Act 1994 and the VAT domestic reverse charge for building and construction services (from 1 March 2021)
Working through an umbrella company — HMRC guidance for workers
Check employment status for tax (CEST) — HMRC tool
Corporation Tax rates and reliefs — GOV.UK
Tax on dividends — GOV.UK
What you must do as a Construction Industry Scheme subcontractor — GOV.UK
sole trader vs limited company — the more common choice for domestic trades
limited company — setting up and running a trades limited company
subcontractors — IR35, CIS and employment status tests from the hiring side
cis tax explained — how CIS deductions and refunds work
domestic reverse charge vat guide — VAT on construction services between VAT-registered businesses