Umbrella company vs limited company — which pays more?
By the PaySlipCheck Editorial team · 15 May 2026 · 9 min read
A limited company will typically leave you with 10–15% more of your day rate than an umbrella will. That's the headline. The question is whether the extra admin, accounting cost, and the risk of getting your IR35 status wrong are worth that 10–15% on your specific contracts. For most contractors earning over £350/day on contracts genuinely outside IR35, the answer is yes. For everyone else, it depends.
How each one works
Umbrella company
You're an employee of the umbrella. The umbrella has a contract with your recruiter or end client and invoices them. They receive the money, deduct employer NI, their margin, the apprenticeship levy if applicable, and then pay you a salary through PAYE just like any other employer. You get a P60 at year-end. Income Tax and employee NI are deducted at source. You get a payslip every week or month.
Mechanically: client pays umbrella → umbrella pays you (PAYE).
Limited company (Personal Service Company)
You incorporate a company at Companies House (~£50, takes 24 hours). You become its director. The company invoices the client. The company books the revenue, pays Corporation Tax on the profit, and you pay yourself a mix of salary and dividends.
Mechanically: client pays your Ltd → Ltd pays Corp Tax → Ltd pays you (salary + dividends).
For the practical step-by-step of incorporation, registering for Corporation Tax and setting up payroll, see FreelanceToolkitUK's walkthrough on setting up a limited company. For the strategy behind the salary/dividend split each year, PennyWise Finance covers dividend vs salary tax planning in more depth.
Take-home comparison by day rate (2025/26)
Assuming 46 working weeks a year, no pension contributions, and £3,000 of allowable expenses for the Ltd company route:
| Day rate | Annual revenue | Umbrella take-home | Ltd take-home | Ltd advantage |
|---|---|---|---|---|
| £300 | £69,000 | £48,200 | £53,500 | +£5,300 |
| £400 | £92,000 | £61,200 | £68,800 | +£7,600 |
| £500 | £115,000 | £73,500 | £83,400 | +£9,900 |
| £600 | £138,000 | £84,800 | £97,200 | +£12,400 |
| £750 | £172,500 | £101,000 | £117,500 | +£16,500 |
| £1,000 | £230,000 | £128,500 | £152,000 | +£23,500 |
Two important caveats: (1) the Ltd column assumes the contract is genuinely outside IR35 — if it's inside, you have to use an umbrella regardless; (2) the Ltd column is gross of accountant fees (£900–£1,800/yr) and Ltd-specific insurance (£150–£300/yr), so deduct ~£1,500/yr for a like-for-like.
For your specific day rate, our day rate / IR35 calculator models both side by side.
What you actually do day-to-day
Umbrella — the easy life
- Submit a timesheet every week (15 minutes).
- Submit any allowable expenses through the umbrella's portal (often there's a daily food allowance if you're on a temporary worksite).
- Get paid weekly or monthly into your personal bank account, taxed at source.
- That's it. No Self Assessment, no company accounts, no VAT.
Limited company — what's involved
- Monthly bookkeeping: log invoices and expenses. Cloud software like FreeAgent, Xero or QuickBooks automates most of this — connect the business bank account and transactions appear automatically. 30–60 minutes a month.
- Annual Company Accounts: filed with Companies House. Your accountant prepares them.
- Annual Corporation Tax return (CT600): filed with HMRC. Accountant again.
- Confirmation Statement: one-page form to Companies House each year (£34 fee).
- Self Assessment for your personal dividend income.
- VAT return if registered (quarterly). Many contractor accountants put you on the Flat Rate Scheme to simplify this.
- PAYE for your director's salary: monthly RTI submission. Software does this automatically.
Total time once set up: maybe 3–5 hours a month, half of which is just sense-checking that your accountant has everything they need.
Costs side by side
| Cost | Umbrella | Limited company |
|---|---|---|
| Company formation | £0 | £50 one-off |
| Accounting software | £0 | £0–£30/month (often free with accountant) |
| Accountant | £0 | £75–£150/month (£900–£1,800/yr) |
| Umbrella margin | £15–£25/week (~£800–£1,300/yr) | £0 |
| Professional indemnity insurance | Sometimes included | £150–£500/yr |
| IR35 insurance | — | £100–£300/yr |
| Business bank account | Not needed | Free options exist (Tide, Starling Business, Revolut Business) |
Net cost of running a Ltd company: typically £1,400–£2,000 a year. Umbrella deductions: typically £800–£1,300 a year. So the Ltd is about £600–£1,000 more expensive in fixed costs, before you account for the tax saving.
The case for each
Pick an umbrella when:
- The contract is inside IR35 — you don't have a choice.
- The contract is shorter than 3 months and you don't see more contracting in your future.
- Your day rate is under £300 and you'd rather not deal with bookkeeping.
- You're nervous about the IR35 grey area and prefer the "definitely correct" tax treatment.
- You want easy access to mortgage applications based on a payslip rather than years of company accounts.
Pick a limited company when:
- The contract is outside IR35 and the rate is £350/day or higher.
- You expect to be contracting for 2+ years.
- You have multiple clients (or expect to soon).
- You want to make substantial pension contributions through the company (huge corp-tax saving).
- You want to retain earnings in the company for tax planning, dividend smoothing, or future investment.
- You're comfortable with light admin and an annual sit-down with an accountant.
Choosing an umbrella company
All umbrellas perform the same legal function — they're PAYE employers — so the take-home figure is determined by the contractor's tax code and the umbrella's margin, not their cleverness with tax. Steer clear of any umbrella that claims to deliver 80%+ retention via "compliant tax avoidance" — these are loan schemes and HMRC will eventually come after the contractor, not the umbrella. The Loan Charge campaigns of 2019 onwards make this point bleakly clear.
Stick to umbrellas on the FCSA accredited list or those with Professional Passport accreditation. Compare on margin (£15–£25/week is the going rate), payroll frequency (weekly vs monthly), payment timing (some pay the day they receive funds, some hold for 7 days), and any extras like sick pay top-ups or salary sacrifice.
Choosing a Ltd company setup
Three ways to do it:
- DIY formation: register at gov.uk/limited-company-formation for £50. Use FreeAgent (often free with Mettle or NatWest business banking) for accounts. Hire an accountant just for the year-end filing.
- Contractor accountant package: firms like Crunch, SJD Accountancy, or Brookson handle the formation, monthly bookkeeping, payroll, year-end and Self Assessment for a flat monthly fee. £80–£150/month.
- Local high-street accountant: more personal service, possibly cheaper, but slower on the contractor-specific stuff (IR35 reviews, dividend strategy).
What if your contract status changes mid-year?
Common scenario: you start an outside-IR35 contract through your Ltd, but the client reclassifies it inside at the next renewal. Two paths:
- Continue with the same client through an umbrella. Your Ltd company sits dormant or you use it for other work.
- Walk away. Some contractors won't accept inside-IR35 contracts on principle — but the market is the market.
You don't need to close the Ltd company. Just leave it open with no transactions for a year if needed (filing the annual Confirmation Statement and dormant accounts costs about £100 in accountant time). When the next outside contract comes up, it's there.
The hybrid option
Many experienced contractors run a Ltd company for outside-IR35 work and use an umbrella for inside-IR35 work in parallel. There's no rule against being a director of a Ltd company while also being an employee of an umbrella. The two tax positions stack — your personal allowance is used by whichever has the higher salary, and dividends from the Ltd are taxed on top of your umbrella income. Your accountant will sort the maths through Self Assessment.
Related: Inside vs outside IR35 — the full guide · Day rate / IR35 calculator · Dividend tax rates 2025/26 · Sole trader vs limited company