If you search Google for anything to do with ‘umbrella companies’ or ‘IR35’, you’ll find dozens of ads for seemingly attractive payment vehicles – aimed at contractors. So how do you know if they’re legitimate?
A quick search for many umbrella-related terms today in 2026 will still surface various umbrella company ads and provider websites, some highlighting take-home pay estimates or tools to “see how much you can take home”.
While the most extreme claims (such as “up to 90% after tax”) are less prominent than they once were – perhaps 10 years ago, some providers continue to emphasise maximum retention or “optimised” pay in their marketing and supplementary text, often alongside assurances of being “100% HMRC compliant” and “IR35 compliant”.
We’ve noticed that aggressive advertising has evolved over recent years, with fewer blanket high-percentage promises in paid search results – thanks in part to ongoing government crackdowns. But contractors should still remain vigilant, especially when offers come through agencies or appear too good to be true.
2026 Update: With new Joint and Several Liability rules coming in April 2026 (see below), agencies and clients could face liability for umbrella non-compliance. This makes spotting legitimate providers even more critical.
What is a legitimate payment structure for a professional contractor?
If you’re hired as a professional contractor, this will almost always be on a business-to-business basis. So there will need to be an intermediary between you (the contractor) and your client, a limited company.
Contractors very rarely operate as sole traders, and a small percentage are PAYE employees of their agencies.
So, for the vast majority of contractors, you either set up your own limited company or work through an umbrella company (which is a limited company itself that provides payroll solutions for contractors).
You can compare the two business structures here.
If you do work via an umbrella company, the only difference in your net take-home pay between one provider and another should be the margin (fee) you pay them.
This is because a legitimate PAYE umbrella company simply processes your pay, after deducting income tax and National Insurance Contributions from your contract earnings. You are taxed in the same way as a traditional payrolled employee.
Government clampdown on tax avoidance schemes
The generic term ‘umbrella’ has been used by a number of non-PAYE payment vehicles in recent years. This can create confusion, particularly for new contractors entering the market, who simply want to use a convenient payroll intermediary.
The Government spends more on tax avoidance now than at any time in the past, but despite this, illegitimate payment schemes are still operating – and the number seems to be increasing.
We suggest that anyone considering joining an umbrella scheme undertake as much research as possible before signing up.
As the controversial Loan Charge demonstrates, many contractors were hoodwinked by professional advisors to join illegitimate payment schemes in the past, only to face ruinous retrospective tax bills today.
2026 Update on Loan Charge: Following the 2025 independent review, HMRC is introducing a new settlement opportunity from early 2026, with reductions (including writing off the first £5,000 of liability for many) to help resolve outstanding cases.
Be aware that HMRC has gone after the users of tax avoidance schemes, not the promoters. Contractors are a far easier target. Over 50,000 individuals have been targeted historically, some of whom have faced six-figure demands for back taxes.
Here are some things to watch out for when looking for an umbrella provider:
Does the company say you can keep 80%, 90% or more of your contract rate after tax?
This would be impossible to achieve legitimately. Corporation Tax is payable on company profits (main rate 25% for profits over £250,000; 19% small profits rate up to £50,000 with marginal relief in between). And after corporate taxes have been deducted where applicable, income tax and NICs are payable on your personal income.
The basic rate of income tax in the UK is 20%!
Don’t forget Employer NICs (now 15% from April 2025), the Apprenticeship Levy (0.5%), and the umbrella company’s weekly or monthly fee.
Try our umbrella company take home calculator. Around 60-70% is a far more realistic take-home percentage for umbrella company contractors in 2025/26, depending on your day rate and circumstances.
Other things to look out for
- Does the scheme sound too good to be true (the take-home pay percentage being a key indicator)?
- Does the scheme seem very complex, given what you want it to provide you (i.e. a simple way to get paid)?
- Does the scheme claim to have been given the all-clear by a ‘top barrister’, or suchlike?
- Are there any artificial arrangements, possibly involving loans, credits, or investments?
- Does the scheme claim to save you income tax or national insurance?
- HMRC doesn’t ‘approve’ any umbrella schemes, so any such claims are bogus.
- ‘HMRC registered’ is misleading. This may refer to the DOTAS requirement of tax avoidance schemes.
- 2026-specific: Watch for “mini-umbrella” structures or schemes avoiding upcoming Joint and Several Liability rules.
Tax avoidance schemes – how they pay you
HMRC’s Spotlight 45 (and related Spotlight 60) provides examples of how tax avoidance schemes work in practice:
- When you are paid, you may receive a small payment, with some income tax and NICs deducted.
- Simultaneously, or shortly after, you receive a larger payment – with no deductions for tax.
- The payments are often made from different bank accounts, possibly from overseas.
- Your payslip may split payments, with the larger amount labelled something other than ‘pay’.
By way of contrast, read this article to find out how a legitimate PAYE umbrella company works in practice.
Upcoming 2026 Changes: Joint and Several Liability
From 6 April 2026, new rules introduce Joint and Several Liability for PAYE/NICs in umbrella supply chains. If an umbrella fails to remit taxes, HMRC can pursue the recruitment agency (or end-client in some cases) for recovery.
This aims to eliminate non-compliant “mini umbrellas” and disguised remuneration fraud. Legitimate umbrellas will comply fully – use accredited providers (e.g., FCSA members) and check payslips carefully.
This is very good, reassuring news for the contracting industry.
Further Reading
- Try our list of umbrella companies if you’re looking for a new provider/want to change providers.
- Here are some initial questions to ask a prospective umbrella provider.
- Don’t forget – if something sounds too good to be true… it probably is!
- HMRC guidance: Work out pay from an umbrella company
Churchill Knight Umbrella - Recommended for Contractors!
