Umbrella Company vs Limited Company
The two main ways UK contractors get paid — explained without the jargon, including where every pound of an umbrella deduction actually goes.
How an umbrella company works
An umbrella company employs you. Your agency pays the umbrella an assignment rate — and that rate has to cover the cost of employing you, not just your wage. Here is the deduction chain, in order:
- Umbrella margin — the umbrella's fee, typically £15–£30 per week (£80–£150/month). This is the only fee the umbrella keeps.
- Employer National Insurance — 15% on everything above £5,000 a year. This is met out of the assignment rate before your gross pay is set. It must never appear as a deduction from your gross pay on the payslip — if it does, challenge it.
- Apprenticeship / Growth & Skills Levy — 0.5% where the umbrella's pay bill exceeds £3m. Most large umbrellas pass this on.
- Your gross pay — whatever is left. From this the umbrella deducts income tax (PAYE), employee NI, your pension contribution and any student loan.
- Take-home pay — what lands in your bank.
Rule of thumb: on a £400/day assignment, roughly £2,000 of weekly assignment income becomes about £1,700 of gross pay before your own tax. Always ask whether a quoted rate is the assignment rate or the rate after deductions — and get a written reconciliation of assignment rate → gross pay.
Umbrella employees do get employment rights: paid holiday (usually accrued at 12.07% of gross or rolled up), minimum wage protection and auto-enrolment pension.
How a limited company works
You run your own company (usually a personal service company). The client pays your company gross. You then decide how to extract the money — the classic approach outside IR35 is a small director's salary (around the NI threshold) plus dividends from the remaining profit after corporation tax (19% on profits up to £50,000, 25% above £250,000, marginal relief between).
- Legitimate business expenses (travel, equipment, accountancy, training) reduce taxable profit.
- You control timing — profits can be retained in the company.
- You handle (or pay an accountant for) bookkeeping, VAT, payroll and annual filings — typically £100–£150/month for accountancy.
- Dividends have a £500 annual allowance, then dividend tax at 10.75% (basic), 35.75% (higher) or 39.35% (additional) for 2026/27.
Side-by-side comparison
| Umbrella | Limited company | |
|---|---|---|
| Best for | Short contracts, inside-IR35 roles, first-time contractors | Longer contracts, outside-IR35 roles, higher day rates |
| Admin | Almost none — umbrella runs payroll | Bookkeeping, filings, VAT — usually via accountant |
| Take-home on £100k | Roughly £56–59k equivalent (PAYE) | Roughly £65–68k via salary + dividends |
| Expenses | Very limited | Deductible against profit |
| Employment rights | Holiday pay, pension auto-enrolment | None (you're the director) |
| IR35 risk | None — you're an employee | You/your client must assess status |
| Cost | £15–30/week margin | £100–150/month accountancy |
Who should pick which?
- Pick umbrella if your contract is inside IR35, the assignment is short, or you want zero admin. Inside IR35 there is no tax advantage to a limited company anyway.
- Pick limited if contracts are outside IR35, your day rate is high, and you're comfortable with (or paying for) the admin. The tax efficiency compounds over time.
- Red flags: any umbrella promising "90% retention" or unusually high take-home is likely a disguised tax avoidance scheme. Stick to established, accredited providers.
General information only — not financial or tax advice. Figures are 2026/27 estimates; confirm with a qualified accountant before deciding.