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Evaluating the unintended cost of IR35 reforms: Freelancers increasingly operating through an umbrella company
- 01 Nov 2021
- Joshua Toovey
Recent media reports have not been supportive of the unregulated umbrella company sector – highlighting cases of fraudulent ‘mini-umbrellas’ and malpractice of some over holiday pay. It was therefore imperative to understand how satisfied contractors, who are now increasingly operating through umbrella companies, are with key areas such as payment timings, holiday pay and business expenses.

Read IPSE’s response to reports of umbrella workers not receiving their fair holiday pay from umbrella companies.
With many clients now requiring contractors to operate through an umbrella company because of the changes to IR35 in the private sector, 34 per cent of contractors now report that they work via an umbrella company – considerably higher than anticipated prior to the reforms (19% expected to work via an umbrella company).
Freedom to choose
With concerns around certain umbrella company practices, the freedom to compare and select an umbrella company to operate through is more essential than ever for contractors.
When asked about their freedom to choose an umbrella company, almost two thirds (63%) of contractors reported that they had some level of choice but were given a limited range of umbrella companies to choose from.
A further 31 per cent of contractors had the freedom to select any umbrella company however, worryingly, five per cent had no choice and were allocated an umbrella company.
Overall Satisfaction
In terms of overall satisfaction, just under half (46%) reported that they were either somewhat or very satisfied with the umbrella company that they are currently operating through.
On the contrary, almost a quarter (23%) were dissatisfied with their umbrella company including almost one in ten (9%) who were very dissatisfied.
Areas of dissatisfaction for contractors
When asked about the key challenges of working through umbrella companies, many contractors cited difficulty in setting up pension arrangements, inability to claim expenses and now being liable for Employer’s NI as reasoning for these levels for dissatisfaction.
“Managing my personal pension has been a real nightmare to continue paying in to. The agency invoices weekly, the umbrella pays weekly. Yet the pension company will only accept monthly contributions. Neither side (umbrella or pension provider) is setup to accept any changes.”
- Contractor now operating through an umbrella company
“Effective reduction in day rate due to having to pay employer's NI”
- Contractor now operating via an umbrella company
Business expenses
For contractors now operating through an umbrella company, another key area of dissatisfaction was with management of business expenses
Many contractors are now unable to claim expenses for travel, accommodation or other associated business costs that could previously be claimed through their limited company.
In fact, over half (55%) of contractors stated that they were either somewhat or very dissatisfied with their umbrella company’s management of businesses expenses, including over a third (37%) who very dissatisfied.
Markedly, only 11 per cent were either somewhat or very satisfied with their umbrella company’s management of business expenses.“Unable to claim expenses for equipment and training which are not supplied by the umbrella co.”
Contractor now operating via an umbrella company
Handling of Employers NI and Apprenticeship Levy
Contractors also had concerns about their umbrella company’s handling of Employers NI and Apprenticeship Levy deductions.
When asked how satisfied they were about their umbrella company’s handling of Employer’s NI and, where applicable, Apprenticeship Levy deductions, one in three (33%) reported that they were either somewhat or very dissatisfied including one in four (25%) who were very dissatisfied.
“I'm much worse off, tax is eye watering and on top I pay an apprenticeship levy and employer’s NI which is a kick in the teeth”
Contractor now operating via an umbrella company
Other areas such as their umbrella company’s handling of holiday pay and pension arrangements received mixed results from contractors. There were, however, higher levels of satisfaction with payment timings and communication.
Overall, the mixed levels of satisfaction across the key areas of umbrella company provision, in particular with holiday pay and pension arrangements, demonstrate the further need for regulation of the sector in order to provide a clearer and more consistent umbrella company experience. In addition, the mixed results across the key areas also highlights the need for contractors to have the freedom to compare and select their preferred umbrella company.
Visit our IR35 News page to keep up with the latest updates, and you can find more support and useful information with our IR35 guide.
Read the full report
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Meet the author

Joshua Toovey
Senior Research and Policy Officer
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