With experts calling for higher national insurance rates to be imposed on self-employed freelancers, an umbrella company can offer contractors protection against any future tax hike plans.
A new report from the CentreForum claims that higher national insurance rates would raise at least £1.6 billion a year and close a common tax avoidance loophole.
It asserts this will ensure self-employed freelancers pay their "fair share" of tax and the extra revenue created could save ordinary workers £110.
Author of 'Ending the self-employment tax break' Adam Corlett claims self-employment is currently taxed at a lower rate than employment. and the self employment equivalent of national insurance has a main rate of nine per cent.
This is considerably lower than the 12 per cent rate imposed on employees.
To even the playing field, Mr Corlett is proposing raising national insurance contributions for freelancers.
Should these proposals be taken onboard by the government, it will become advantageous for contractors to work under an umbrella company.
"There is no compelling reason for the self-employed to pay any less into the system. The large tax differential leaves the door open to tax avoidance and benefits the richest most," Mr Corlett explained.
The CentreForum think tank isn't the first academic body to criticise current national insurance policy in the UK. Paul Johnson from the Institute of Fiscal Studies' has previously identified that the system could be used for tax avoidance.
It is claimed that the self employed are essentially receiving a £1.6 billion tax break, rising to £2.3 billion once a single-tier pension is introduced.
"Self-employment income is treated too generously, even after accounting for (ever-diminishing) differences in benefit entitlement," Mr Corlett said. "Ending unjustified tax breaks should be near the top of the list of ways to reduce the deficit."
However, not to be biased, the forum claims that Class 2 national insurance should be scrapped. This would mean a freelancer earning over £5,725 would no longer have to pay £141 to the public coffers.