Limited company vs umbrella
Two ways to get paid as a contractor. One can save you thousands a year — but only if your contract is outside IR35. Inside IR35, the gap all but disappears, and the question flips to admin and hassle.
The verdict
It hinges almost entirely on IR35. Outside IR35, a limited company is usually far more tax-efficient — a contractor on £400 a day might keep around £15,000 more a year than via an umbrella. Inside IR35, that advantage largely vanishes, and an umbrella’s simplicity makes it the sensible choice for most. So the real first question isn’t “which structure?” — it’s “what’s my IR35 status?”
Limited company
Your own company invoices the client
- Far more tax-efficient outside IR35
- Low salary + dividends cuts NI
- Claim business expenses, full control
- Real admin: accounts, payroll, filings
- Accountancy fees (~£100+/month)
- No advantage if inside IR35
Umbrella
Umbrella employs you, runs PAYE
- Zero admin — fully hands-off
- Simple, sensible inside IR35
- Employment rights & statutory pay
- Employer’s NI deducted from your rate
- Weekly margin (~£25–£40)
- Lower take-home outside IR35
IR35 decides almost everything
Before you compare a single number, you need your IR35 status — because it changes the answer completely. IR35 is the rule that decides whether HMRC sees you as a genuine business or a “disguised employee.” Outside IR35, you’re a real business and a limited company’s tax planning is open to you. Inside IR35, your contract income is taxed as employment, and the company structure’s advantages evaporate.
Here’s the mechanism. Through a limited company outside IR35, you take a low salary up to the National Insurance threshold and draw the rest as dividends — which carry no National Insurance and are taxed at lower rates. Through an umbrella, you’re an employee: the umbrella receives your contract rate, deducts employer’s National Insurance and its own margin, and runs full PAYE on what’s left. The catch that blindsides new contractors is that employer’s NI comes out of your rate, not on top of it — which is why the umbrella take-home looks lower than the headline day rate suggests.
The numbers at £400 a day
On a £400-a-day contract (about £92,000 of annual contract value, 46 weeks), the structure makes a striking difference outside IR35 — and almost none inside it. These are illustrative ranges, not a personal quote; your real figures depend on your salary/dividend split, expenses and exact rates.
| Scenario | Structure | Rough take-home |
|---|---|---|
| Outside IR35 | Limited company | ~£75,000 |
| Outside IR35 | Umbrella | ~£60,000 |
| Inside IR35 | Umbrella | ~£60,000 |
| Inside IR35 | Limited company | ~£60,000 |
Read down the right-hand column and the story jumps out: the only figure that’s meaningfully higher is the limited company outside IR35. Inside IR35, all three converge — which is why running a company inside IR35 means taking on the admin for no tax reward. The dividend angle got a touch weaker recently too: dividend tax rates rose by two percentage points, narrowing the limited company’s edge slightly, though outside IR35 it remains the clear winner for most.
When each one wins
Limited company wins when…
- Your contracts are genuinely outside IR35.
- You’re earning roughly £350+ a day and contracting long-term.
- You’re comfortable with — or will pay for — the admin.
- You want to claim expenses and control your own finances.
Umbrella wins when…
- Your contract is inside IR35 (the tax gap disappears).
- You’re contracting short-term or testing the waters.
- You want zero admin and a simple weekly payslip.
- You value employment rights and statutory pay.
One change worth knowing about: the umbrella market tightened up in 2026. New rules make recruitment agencies — and sometimes end clients — jointly liable if an umbrella fails to operate PAYE correctly. That’s good news for contractors, because it pushes non-compliant umbrellas out of the supply chain, but it’s a reminder to use a reputable, established provider rather than whichever one promises the highest take-home.
Common questions
Is a limited company or umbrella better for contractors?
It depends on your IR35 status. Outside IR35, a limited company is usually significantly more tax-efficient — a £400-a-day contractor might keep around £15,000 more a year. Inside IR35, the tax advantage largely disappears and an umbrella’s simplicity makes it the better choice for most. Establish your IR35 position before deciding on structure.
Why is my umbrella take-home lower than my day rate suggests?
Because employer’s National Insurance and the umbrella’s margin are deducted from your contract rate before it becomes your taxable pay — not added on top. Many contractors are surprised by this on their first payslip. The umbrella receives your full rate, takes out employer costs and its fee, then runs PAYE on what remains.
How does a limited company save tax outside IR35?
You take a low salary up to the National Insurance threshold and draw the rest as dividends. Dividends carry no National Insurance and are taxed at lower rates than salary, so the overall tax and NI bill is smaller than employment income of the same size. This only works outside IR35 — inside IR35, the income is taxed as employment regardless.
Can I use a limited company if I’m inside IR35?
Yes, you can form one, but the tax benefits are largely unavailable inside IR35, because the income is taxed as employment. You’d take on company admin and accountancy costs for little or no tax reward. For contracts that are consistently inside IR35, an umbrella is usually the more sensible route.
What does an umbrella company cost?
Umbrellas charge a margin, typically around £25 to £40 a week. On top of that, employer’s National Insurance is deducted from your contract rate. A limited company instead carries accountancy fees of roughly £100 or more a month, but no umbrella margin. Which works out cheaper overall depends heavily on your IR35 status and day rate.
Did dividend tax changes affect the comparison?
Slightly. Dividend tax rates rose by two percentage points, which narrows the limited company’s advantage a little at higher income levels. But for contractors working outside IR35, a limited company remains considerably more tax-efficient than an umbrella for most. The change makes careful salary and dividend planning more valuable, not less.
Related tools & guides
How we put this together
Comparison reflects how the two contractor models work under current UK rules: a limited company outside IR35 takes a low salary plus dividends, while an umbrella employs you and runs PAYE with employer’s NI and a margin deducted from your contract rate. IR35 status is the decisive factor.
Illustrative take-home figures are based on a £400-a-day contract (about £92,000 a year, 46 weeks) using published contractor comparison estimates for 2025/26–2026/27, with dividend tax at current rates. Actual figures depend on your salary/dividend split, expenses, exact rates and provider; this is not a personal quote.
We review this comparison when tax rates, NI thresholds, dividend rates or IR35/umbrella rules change.