Limited company or umbrella? It’s the first decision every new contractor faces, and one many established contractors revisit with each new contract. The honest answer: it depends mostly on your IR35 position — and the difference in take-home pay between the two can run to thousands of pounds a year.
What each option actually means
With an umbrella company, you become an employee of the umbrella. Your agency pays the umbrella, the umbrella deducts its weekly or monthly margin plus the employment costs (employer’s National Insurance and the apprenticeship levy come out of your assignment rate), then pays you a salary through PAYE. There’s nothing to run and nothing to file — but you pay employee-level tax on everything, plus those employment costs, and you can’t claim tax relief on most expenses.
With your own limited company, you’re the director and shareholder. Your company bills the client, pays for genuine business costs before tax, and you pay yourself with a mix of salary and dividends — which is usually far more tax-efficient than pure PAYE. The trade-off is admin: accounts, payroll, VAT and tax returns. That’s exactly the part an accountant takes off your plate.
Why a limited company usually pays more
- Dividends escape National Insurance. Taking most of your income as dividends rather than salary avoids NI on that money — the single biggest saving.
- Business expenses get tax relief. Equipment, software, travel, insurance, pension contributions and your accountancy fee all reduce your company’s corporation tax bill. Through an umbrella, you still pay for most of these — just from taxed pay.
- You control the timing. Profit can be left in the company, paid into a pension, or drawn in a lower-income year — options an umbrella employee simply doesn’t have.
When an umbrella makes sense
An umbrella is the right call when your contract is inside IR35 — the tax advantages of a company largely disappear for that engagement, so the umbrella’s simplicity wins. It can also suit a first short contract while you decide whether contracting is for you. If you’re not sure where your contract sits, start with our guide What is IR35? — and remember that a company can run inside-IR35 and outside-IR35 contracts side by side, so one inside contract doesn’t have to send you to an umbrella.
See your own numbers
Rates and thresholds move every tax year, so rather than quote figures that will drift out of date, we keep a calculator updated with the current year’s rules. Put in your day rate and expenses and see the two options side by side, line by line:
Compare limited company vs umbrella take-home pay →
And if you decide to go limited, it’s less work than you’d think: we form the company for you free of charge, set up FreeAgent, and handle the payroll, VAT and filings — so the admin gap between umbrella and limited mostly disappears. See how to set up a limited company and how to pay yourself for what’s involved.