The short answer
A limited company usually gives contractors higher take-home pay and more control when they work outside IR35, but it brings admin and responsibility. An umbrella company is simpler because it employs you and handles payroll, but it takes employer National Insurance and fees from your pay, and inside IR35 contracts the gap narrows.
Checked 26 October 2026. Rates for 2026/27.Key facts
| Fact | Detail |
|---|---|
| Limited company | You are director and owner |
| Umbrella company | You are an employee on PAYE |
| Outside IR35 | Ltd usually higher take-home |
| Inside IR35 | Take-home often similar |
| Admin | Ltd: accounts, tax, filings; umbrella: minimal |
Two ways to work as a contractor
Contractors in the UK usually work in one of two ways. In the first, they set up their own limited company, invoice clients through it, and pay themselves a salary and dividends. In the second, they join an umbrella company, which employs them, invoices the agency or client on their behalf, deducts tax, National Insurance and its fee, and pays the remainder as a salary.
Both are legal, and many contractors switch between them as contracts and circumstances change. The best choice depends on the IR35 status of the contract, the length of the assignment, your appetite for admin and what you want to take home.
How a limited company works for contractors
With a limited company, your company contracts with the client or agency. You are a director and shareholder, and you decide how to take money out, normally a small salary plus dividends, with expenses and pension contributions where suitable. The company pays Corporation Tax on its profit.
The advantages include control, tax efficiency where the contract is outside IR35, the ability to claim business expenses, and the option to build the business over time. The disadvantages are the admin, including accounts, filings, tax returns and bookkeeping, personal responsibility for compliance, and the cost of an accountant.
How an umbrella company works
An umbrella company employs you and passes your contract through its payroll. The agency pays the umbrella, which deducts its fee, employer National Insurance, apprenticeship levy and holiday pay if applicable, and then pays you after PAYE and employee National Insurance. You receive a payslip like any employee.
The advantages are simplicity, no company to run and no accounts to file, and employment rights such as holiday pay and statutory pay. The disadvantages are that you pay employer National Insurance and fees out of your gross rate, you can claim fewer expenses, and the take-home is usually lower than a well-run limited company outside IR35.
IR35 and why it matters
IR35, also called the off-payroll working rules, decides whether a contractor is effectively an employee for tax purposes. If a contract is inside IR35, the contractor is taxed much like an employee, and the benefit of the limited company is largely lost. If it is outside, the contractor can use the company structure to pay lower tax.
For medium and large private-sector clients and the public sector, the client decides the status and issues a status determination. For small clients, the contractor’s company decides. The decision depends on factors such as control, substitution and mutuality of obligation, not on the label in the contract.
Comparing take-home pay
As a simple illustration, a contractor billing £500 a day for 220 days earns £110,000 in a year. Outside IR35, a limited company paying a small salary and dividends can leave the contractor with a take-home of roughly £70,000 to £75,000 after company costs and tax. Through an umbrella, the gross is reduced by employer NI at 15% and fees, then taxed as employment income, giving about £60,000 to £65,000.
Inside IR35, the limited company pays a deemed employment payment, and the take-home often falls close to the umbrella result, sometimes a little higher because of expenses. These figures are only indicative, and your own result depends on your costs, pension contributions and tax position.
Costs and responsibilities
A limited company brings fixed costs, including an accountant, which for a contractor often costs from £50 to £150 a month, plus insurance, software and the Companies House fee. You are responsible for filing accounts, paying Corporation Tax, running payroll and completing your own Self Assessment.
An umbrella charges a weekly or monthly fee, typically £15 to £30 a week, and deducts employer National Insurance. It handles PAYE and payroll, but you remain responsible for checking the fee and that the umbrella is compliant, because some umbrellas have been involved in tax avoidance schemes.
Risks and compliance
The main risk of a limited company is getting IR35 wrong. If HMRC decides a contract was inside IR35 and the company treated it as outside, it can demand unpaid tax and National Insurance, plus interest and penalties. Take a professional IR35 review of each contract.
The main risk with umbrellas is choosing a non-compliant provider. Check that the umbrella is registered with a recognised accreditation body, avoid anything that promises unusually high take-home pay, and be aware of changes to the liability rules for umbrella companies, which are shifting responsibility to recruitment agencies. Always check the latest guidance.
How to choose
Think about the length of your contract, its IR35 status, your admin tolerance and the likely income. For short contracts or when you want simplicity, an umbrella may suit. For longer contracts outside IR35, or when you want to build a business, a limited company usually wins. If you are inside IR35 and have no other income, the difference may be small, and an umbrella can be sensible.
It is also possible to keep the company and use an umbrella for inside-IR35 work, though you need to think about the accounts and costs of keeping a dormant or low-activity company. An accountant can model the numbers for your situation in a few minutes.
Switching between a limited company and an umbrella
Many contractors move between the two models as work changes. A short contract inside IR35 may suit an umbrella, because there is nothing to set up and the engagement can start immediately. A longer assignment outside IR35 may justify a limited company, where the extra admin is repaid by higher take-home pay. If you already have a company and take an inside IR35 role, you can usually keep the company dormant or continue to use it for other clients, rather than closing it. Keep your accountant informed of every change, because the way income is reported, and the way VAT and payroll are handled, changes with each switch. Planning the transition in advance avoids gaps in pay and surprise tax bills.
Questions to ask before you decide
Before choosing, ask a few practical questions. Has the client or agency issued a status determination, and does it look reasonable once you read the contract and consider how you will actually work? How long is the assignment likely to last, and will there be gaps between contracts? Do you want to run a business, with the paperwork and responsibility that involves, or would you prefer a simple payslip? Are you comfortable with the risk that a status dispute could lead to tax being reclaimed? Finally, do you have other income, a mortgage application coming up or pension goals that make one structure more attractive than the other? Honest answers usually point to the right model.
Mortgages, pensions and benefits
Your choice also affects life outside tax. Mortgage lenders often treat a limited company director’s income differently from an employee’s, looking at salary plus dividends or at retained profits over two years, while an umbrella payslip is easier to evidence. Employer pension contributions can be very tax efficient through a company, whereas umbrella workers receive the statutory workplace pension. Statutory sick and holiday pay are built in with an umbrella but must be self-funded through your company. Weigh these points alongside the headline take-home figure, because the cheapest option on paper is not always the best for your wider finances.
The bottom line
A limited company usually gives contractors higher take-home pay and more control when they work outside IR35, but it brings admin and responsibility. If you would rather not do it alone, our fixed fees start at £45.83 + VAT a month.
Frequently asked questions
Is it better to be a contractor through a limited company or an umbrella?
A limited company generally gives higher take-home for contracts outside IR35, while an umbrella is simpler and often comparable for contracts inside IR35.
What is IR35?
IR35 is a set of tax rules that decide whether a contractor working through their own company should be taxed like an employee. If a contract is inside IR35, the company structure loses much of its tax advantage.
How much does an umbrella company charge?
Typically £15 to £30 a week in fees, plus employer National Insurance and apprenticeship levy, which are deducted from your gross rate.
Can I switch between a limited company and an umbrella?
Yes. Many contractors use the company for outside-IR35 work and an umbrella for inside-IR35 contracts, though you should plan the costs of keeping both.
Do contractors need an accountant?
Contractors with a limited company need to file accounts and tax returns, so most use an accountant. Umbrella contractors have fewer filings, but may still need to do a Self Assessment return.
Can I use both a limited company and an umbrella?
Yes. Some contractors keep a limited company for outside-IR35 contracts and use an umbrella for assignments that fall inside IR35. You cannot run the same engagement through both, but you can use each model for different contracts over time.
Do I need an accountant as a contractor with a limited company?
It is not a legal requirement, but most contractors use one. Company accounts, corporation tax, payroll, dividends and VAT all have deadlines and penalties, and a specialist can also help with IR35 questions and tax-efficient pay.
This article is general information, not personal tax or financial advice. Rules and rates change, so check GOV.UK or speak to an accountant about your circumstances. Rates shown are for 2026/27, last checked November 2026.