CIS: Umbrella Company vs Sole Trader

Two Ways to Work in Construction

As a subcontractor in the UK construction industry, you generally have two main options: work as a sole trader under CIS, or work through an umbrella company. Each has different implications for tax, cash flow, and administration.

Working as a Sole Trader

As a sole trader, you are self-employed. Contractors verify you with HMRC and deduct 20% (or 0% with GPS) from your labour payments. You file a Self Assessment tax return at the end of the year and reclaim any overpaid CIS deductions.

Advantages:

• You keep more of your earnings (after expenses and tax)
• You can claim all legitimate business expenses
• You control your own finances
• Potential for CIS refunds
• You can apply for Gross Payment Status

Disadvantages:

• You must manage your own bookkeeping and tax returns
• No employer's National Insurance contributions towards your state benefits
• No employment rights (no holiday pay, sick pay, or pension contributions from an employer)
• You bear the administrative burden

Working Through an Umbrella Company

An umbrella company employs you and handles all the administration. The contractor pays the umbrella company, which then pays you as an employee via PAYE after deducting tax, National Insurance, and their fee.

Advantages:

• Minimal admin — the umbrella handles payroll and tax
• Employment rights — holiday pay, potentially pension contributions
• Consistent payslips
• No Self Assessment required (in most cases)

Disadvantages:

• You take home less — the umbrella charges a fee (typically £20-30 per week)
• Employer's National Insurance is deducted from your pay packet
• You cannot claim the same range of business expenses
• No CIS refund opportunity
• Less control over your finances

The Financial Comparison

On £40,000 gross annual income:

Sole trader (20% CIS, £8,000 expenses claimed):

• Taxable profit: £32,000
• Tax and NI after Personal Allowance: approximately £5,500
• CIS deductions: £8,000
• Estimated refund: approximately £2,500
• Net income: approximately £34,500

Umbrella (after employer's NI and fees):

• Umbrella fee: approximately £1,300
• Employer's NI: approximately £3,500
• Gross taxable pay: approximately £35,200
• Tax and employee's NI: approximately £6,400
• Net income: approximately £28,800

The sole trader takes home roughly £5,700 more per year in this scenario. The exact difference depends on your expenses, income level, and the umbrella company's fees.

Which Is Right for You?

Choose sole trader if: you want to maximise earnings, are comfortable managing basic bookkeeping, and want the flexibility of self-employment.

Choose umbrella if: you want zero admin, do not mind earning less, and value the simplicity of PAYE.

For most experienced construction workers, working as a sole trader with good accounting software is the better financial option. Accounted makes the admin side painless.

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Keep more of your hard-earned money. Sign up for Accounted and work as a sole trader with Penny managing your CIS bookkeeping.