How each one works
Umbrella company
You're employed by the umbrella under a contract of employment. The umbrella signs the work contract with your end client (or with a recruitment agency that's contracted with the client), invoices the client, deducts the costs of being an employer plus their own margin, and pays you a salary through PAYE.
Mechanically: client pays umbrella → umbrella deducts employer costs → umbrella pays you (PAYE).
The umbrella issues you a P60 at year-end like any other employer. Income Tax and employee NI are deducted at source. You get a weekly or monthly payslip. No Self Assessment unless you have other income.
Limited company (Personal Service Company)
You incorporate a company at Companies House (~£50, takes 24 hours). You become its sole director. The company has a separate legal identity, can invoice clients, hold a bank account, sign contracts.
Mechanically: client pays your Ltd → Ltd pays Corporation Tax on profit → Ltd pays you (salary + dividends).
You're an employee of the company (paid via PAYE on the small director's salary) and a shareholder (paid via dividends from post-tax profit). Annual obligations include CT600 to HMRC, annual accounts to Companies House, confirmation statement, and Self Assessment for your personal dividend income.
Take-home comparison by day rate
The numbers below assume 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 caveats: (1) the Ltd column assumes the contract is genuinely outside IR35 — if inside, you have to use umbrella regardless; (2) the Ltd column is gross of accountancy fees (£900-£1,800/yr) and Ltd-specific insurance (£150-£300/yr), so deduct ~£1,500/yr for a like-for-like.
After adjusting for accountancy costs, the Ltd advantage on a £400/day contract is roughly £6,000/year. On a £600/day contract it's roughly £11,000/year.
For your specific situation, the Day Rate / IR35 Calculator shows 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 accounting software 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 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/year) |
| Umbrella margin | £15-£25/week (£800-£1,300/year) | £0 |
| Professional indemnity insurance | Sometimes included | £150-£500/year |
| IR35 insurance | — | £100-£300/year |
| Business bank account | Not needed | Free options exist (Tide, Starling, Revolut) |
| Confirmation statement | — | £34/year |
| Approximate annual total | £800-£1,300 | £1,200-£2,000 |
Net cost premium of Ltd over umbrella: about £400-£700/year. That's small relative to the tax saving once day rate is above £350-£400.
When to use each
Pick umbrella when
- The contract is inside IR35 — no choice, this is what you have to do
- 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 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 Corporation 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 your take-home is determined by your tax code and the umbrella's margin, not their cleverness with tax. Steer clear of any umbrella claiming 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)
- Extras like sick pay top-ups, holiday pay handling, salary sacrifice for pension
Common UK umbrellas: Parasol, NumberMill, Brookson, Giant Group, Clearsky, Paystream.
Choosing a limited company setup
Three ways to set up:
- DIY formation: register at gov.uk/set-up-limited-company for £50. Hire an accountant just for the year-end filing.
- Contractor accountant package: firms like Crunch, SJD Accountancy, or Brookson handle 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 contractor-specific stuff (IR35 reviews, dividend strategy).
Most contractors choose option 2 — the specialist contractor accountant package. See how to set up a limited company for the full step-by-step.
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. Self Assessment reconciles the cumulative position.
In short
Limited company delivers ~10-15% more of your day rate than umbrella, at the cost of moderate ongoing admin and a £400-£700/year net cost premium. For outside-IR35 contracts above £350/day, the maths clearly favours Ltd. For inside-IR35 contracts, umbrella is the only legitimate option.
For the underlying status question, see inside vs outside IR35. For the operational steps if Ltd is the right call, see how to set up a limited company. For the broader business-structure decision (sole trader vs Ltd), see sole trader vs limited company.