The choice between an umbrella company and your own limited company comes down to two factors: your IR35 status and your preference for simplicity versus tax efficiency. If you are operating outside IR35 and have consistent work, a limited company is almost always more tax-efficient. If you are inside IR35, an umbrella company is often simpler and broadly equivalent in cost.
How an umbrella company works
An umbrella company employs you and contracts with your agency or end client on your behalf. You submit timesheets and expenses; the umbrella invoices the client and pays you as an employee via PAYE. You pay Income Tax and National Insurance through the standard employee system. The umbrella charges a monthly fee (typically £15 to £30 per week).
How a limited company works
You set up and control your own limited company. The company contracts with clients or agencies. You take a small salary and draw the remaining profit as dividends. You pay Corporation Tax on company profits and dividend tax on drawings. You are responsible for running the company, filing accounts, and managing payroll.
Side-by-side comparison
| Factor | Umbrella company | Limited company |
|---|---|---|
| Tax efficiency | Lower (PAYE + employee NI) | Higher outside IR35 (salary + dividends) |
| Admin | Very low (just timesheets) | Moderate (accounts, payroll, returns) |
| IR35 relevance | IR35 does not apply | Fully subject to IR35 rules |
| Set-up cost | None | £12 to £50 to incorporate |
| Monthly cost | £60 to £120/month umbrella fee | £50 to £150/month accountancy fee |
| Take-home pay (outside IR35) | 75 to 80% of contract rate | 80 to 85% of contract rate |
| Take-home pay (inside IR35) | 60 to 65% of contract rate | 60 to 65% (similar, with extra admin) |
| Employment rights | Yes (holiday pay, sick pay via umbrella) | No (you are a director, not an employee) |
| Flexibility | Start/stop easily between contracts | Some overhead to close down |
When to use an umbrella company
- Your engagement is inside IR35 and running a PSC has no tax advantage
- You are new to contracting and want to start quickly with minimal admin
- You have short contracts with gaps in between
- Your contract rate is relatively low (below £250/day) and the limited company saving does not justify the overhead
- You prefer the employment rights and simplicity an umbrella provides
When to use a limited company
- You are clearly outside IR35 and want to maximise take-home pay
- Your contract rate is above £250 to £300 per day and you work consistently
- You want to retain profits in the company for future investment
- You are building a genuine business and want the credibility of a Ltd company
Fraudulent umbrella schemes (often involving disguised remuneration or loan arrangements) have cost contractors significant sums and created large tax liabilities. Only use FCSA-accredited umbrella companies. See our best umbrella companies guide for reviewed options.
This guide provides general information only. IR35 is complex and the consequences of getting it wrong are significant. Always seek specialist advice from a qualified tax adviser. Find one via our accountant directory.