In short
Outside IR35 and contracting long-term? A limited company usually wins on take-home. Inside IR35, short-term, or want zero admin? An umbrella is simpler, and the difference is small.
The two ways to contract
Umbrella company
You become an employee of an umbrella company. It invoices the agency, pays you through PAYE, and deducts income tax, National Insurance, and a small margin. You get employment rights and zero accounting admin.
Your own limited company
You form and run your own company (a "personal service company"), invoice clients through it, and pay yourself a tax-efficient mix of salary and dividends. More take-home when outside IR35 — but you carry the admin and director's responsibilities.
Side by side
| Factor | Umbrella | Limited company |
|---|---|---|
| Take-home (outside IR35) | Lower (~55–65%) | Higher (~70–80%) |
| Admin | None — the umbrella does it | Accounts, VAT, payroll, tax returns |
| Expenses | Very limited | Full allowable business expenses |
| IR35 risk | Not your concern | You must assess each contract |
| Employment rights | Yes (holiday, statutory pay) | No — you are a director |
| Best for | Short / inside-IR35 / first contracts | Ongoing, outside-IR35 contracting |
Want real numbers for your day rate? Try our contractor take-home calculator.
When an umbrella makes sense
- →Your contract is inside IR35 — the limited-company tax advantage largely disappears
- →You are contracting short-term or trying it out for the first time
- →You want zero admin and guaranteed employment rights
- →You value simplicity over squeezing out the last few percent of take-home
When a limited company wins
- →You are contracting outside IR35 on ongoing engagements
- →Your day rate is high enough that the tax saving outweighs the admin
- →You want to claim legitimate business expenses and control your income
- →You are building a longer-term contracting career and want to retain profit
The IR35 factor
IR35 is the deciding factor for most contractors. If a contract is inside IR35, you are taxed broadly as an employee whether you use a limited company or not — so the umbrella's simplicity usually wins. If it is outside IR35, a limited company lets you take dividends and keep significantly more of your income.
Getting your status right matters. Our IR35 guide explains the tests, and we review contracts and give a documented status opinion as part of our contractor accounting service.
Frequently Asked Questions
Is a limited company or umbrella better for a contractor?
If you are working outside IR35 on ongoing contracts, a limited company almost always leaves you with more take-home pay, because you can take a tax-efficient mix of salary and dividends. If you are inside IR35, on a short assignment, or simply want zero admin, an umbrella company is usually simpler and the take-home difference is small. The right answer depends on your IR35 status, day rate, and how long you plan to contract.
How much more do you take home with a limited company?
Outside IR35, a limited company contractor typically keeps around 70–80% of their contract income versus roughly 55–65% through an umbrella, because dividends avoid National Insurance and the umbrella deducts employer NI plus its own margin. The gap narrows sharply — or disappears — inside IR35. Use our contractor take-home calculator for an estimate based on your day rate.
What is an umbrella company?
An umbrella company employs you and processes your pay through PAYE. You submit timesheets, the umbrella invoices the agency or client, and pays you a salary after deducting income tax, employee and employer National Insurance, and a small weekly or monthly margin. You get employment rights (holiday pay, statutory payments) and zero accounting admin, but the lowest take-home of the options.
Can I switch between umbrella and a limited company?
Yes. Many contractors start under an umbrella for their first short contracts, then form a limited company once they are settled, contracting outside IR35, and earning enough for the tax savings to outweigh the admin. You can also run a limited company but use an umbrella for the occasional inside-IR35 contract. We help contractors set up, switch, and run whichever structure fits each engagement.