Umbrella or limited company
Your IR35 status decides how a contract is taxed. How you get paid is a separate choice, and for a lot of contractors it is now closer than it used to be.
Updated 1 August 20267 min read
These two decisions get tangled together, so it is worth separating them. IR35 status is decided by the client and describes the engagement. How you get paid is your choice, within limits: an inside IR35 contract has to be paid through PAYE, which in practice means an umbrella or the agency's own payroll, while an outside IR35 contract can be invoiced by your own company.
If all your work is inside IR35, a limited company earns you nothing and costs you fees. If your work is outside, the company is worth having. The interesting case is the contractor who has both in a year, and that is most people now.
Side by side
| Umbrella | Limited company | |
|---|---|---|
| Setup | A day, sometimes an hour | A week or so with a bank account and insurance |
| Running cost | £15 to £30 a week, only when you are paid | £100 to £150 a month for an accountant |
| Admin | Submit a timesheet | Annual accounts, corporation tax return, confirmation statement, VAT, payroll, self assessment |
| Take-home on the same rate | Lower, and employer NI comes out of the rate | Higher, through a small salary and dividends |
| Control of income | None. You are paid when you work | You choose when to draw profit, which smooths a lumpy year |
| Pension | Salary sacrifice, escaping tax and both sides of NI | Employer contribution before corporation tax |
| Rights | Employed by the umbrella: holiday, sick pay, pension, statutory leave | None. You are a business |
| Risk you carry | Choosing a non-compliant umbrella | Directors' duties and an HMRC status enquiry on small-client work |
What the money actually looks like
On 2026/27 rates the two are closer than the folklore suggests, and how close depends on the rate, because each route crosses tax thresholds at different points. A limited company keeps its advantage mainly through the first slice of dividends, taxed at 10.75 per cent, and the tax-free personal allowance taken as salary. Above that, corporation tax at an effective 26.5 per cent followed by dividend tax at 35.75 per cent is not far off PAYE at 40 per cent plus 2 per cent National Insurance.
Run your own figure in the IR35 calculator rather than trusting a percentage from an article written before the rates changed.
Choosing an umbrella
Assume every umbrella will show you an illustration that flatters it. The figures are set by tax law, not by the provider, so any illustration that looks unusually good is either using different assumptions or is not compliant. Compare the margin, then compare the service.
- Accreditation. FCSA or Professional Passport, checked on the accreditor's own directory rather than on the umbrella's website. Accreditations lapse, and the logo tends to stay up.
- A clear margin. One number, charged only in weeks you are paid. Watch for a joining fee, a leaving fee or a charge for same-day payment.
- A key information document before you sign. It is a legal requirement, and it must show the deductions in dispute-proof detail.
- Holiday pay you can see. Ask whether it is rolled up into each payment or held back, and how you claim it. Unclaimed holiday pay is one of the oldest complaints in the sector.
- Pension flexibility. Salary sacrifice into your own SIPP is the single most valuable thing an umbrella can offer a higher rate contractor.
Our umbrella comparison lists providers with their accreditation status and what they charge for.
Schemes to walk away from
If a provider promises 80, 85 or 90 per cent take-home, it is not an umbrella company, whatever it calls itself. The arithmetic does not exist. These arrangements pay a small taxed salary and route the rest as a loan, an advance, a grant, shares or a payment from an offshore trust, and HMRC treats the lot as disguised remuneration. The person left with the tax bill is you, not the promoter, and the bill arrives with interest years after the scheme has closed.
Since April 2026 agencies carry joint and several liability for unpaid PAYE in umbrella supply chains, which has pushed a lot of the worst providers out of agency-supplied work. What changed in April 2026 explains why your agency may now insist on its own approved list.
Common questions
Is an umbrella company worse than a limited company?
It pays less on the same rate, but by less than it used to. Corporation tax at 25 per cent, employer National Insurance at 15 per cent and the April 2026 dividend rise have all narrowed the gap. Against that, an umbrella costs you no accountancy fees, no filing deadlines and no personal risk on a status decision, so on a short inside IR35 contract it is often the sensible choice.
Can I keep my limited company while working through an umbrella?
Yes, and many contractors do. A dormant company costs almost nothing to maintain and takes minutes to reactivate when an outside IR35 contract comes along, which is far quicker than incorporating again and reopening a business bank account. You still have to file a confirmation statement and dormant accounts each year.
What is a reasonable umbrella margin?
Most sit between £15 and £30 a week, and the margin is the only part of your pay the umbrella actually keeps. Anything much below that range is worth questioning, and anything above it should be buying you something specific. Margins are usually negotiated between the umbrella and your agency, so the figure you are quoted is not always the one another contractor gets.
Do I pay employer National Insurance through an umbrella?
Not directly, but it comes out of the assignment rate before your gross pay is worked out, so in practice you fund it. That is why an inside IR35 rate has to be higher than an outside one to leave you in the same position, and why comparing a limited company day rate with an umbrella assignment rate as though they were the same thing is misleading.
Are umbrella schemes promising 80 or 90 per cent take-home legal?
No. Nobody can pay you 85 per cent of a contract rate after tax at higher rate earnings. Those arrangements route part of your pay as a loan, an annuity, a grant or shares, and HMRC treats them as disguised remuneration. The contractor, not the scheme, ends up with the bill, often years later and with interest.
General information, not tax or financial advice. Costs quoted are typical market figures and will vary by provider and by agency.