If you’re stuck choosing between an umbrella company and a limited company, don’t stress. You’re not alone. Here’s exactly what you need to know to make the right call.
What’s the key difference?
Umbrella companies treat you like an employee, while limited companies let you be your own boss. That changes how you pay tax, get paid, and run your contract.
With an umbrella, you’re on their payroll. They handle tax, National Insurance, payslips, and pension auto-enrolment. You submit timesheets, and they pay you through PAYE.
With a limited company, you set one up in your name. You’re the director and shareholder. You pay yourself with a mix of salary and dividends, handle your own accounts, and file tax returns.
Which one saves more on tax?
Limited companies give you more tax-efficient take-home pay, especially if you’re outside IR35 and earning over £40,000 a year.
Umbrella companies take care of everything, but they include Employer’s NI, Apprentice Levy, and their margin in the rate they offer you. So, your actual take-home may be less than it looks on paper. Use this calculator to see your estimated take-home umbrella pay.
Limited companies let you split your income. You pay a small salary to stay below the NI threshold and top up with dividends, which are taxed lower. This setup usually means higher take-home if you manage it right.
| Umbrella | Limited Company | |
|---|---|---|
| Take-home pay | Lower | Higher (if outside IR35) |
| Tax control | None | Full control |
| Admin time | Very low | Medium to high |
How IR35 and protections affect your choice
IR35 rules can wipe out the benefits of a limited company if your contract is caught inside IR35. In that case, umbrella might be easier and safer.
If you’re inside IR35, you must pay full tax like an employee. Even if you run a limited company, you can’t take dividends. Umbrella handles this without the admin.
Umbrella companies also give you some workplace benefits. You get sick pay, holiday pay, workplace pension, and maternity pay. A limited company won’t do that – you’d need to arrange your own cover or insurance.
If you’re outside IR35 and want flexibility, limited is usually better. But inside IR35, an umbrella can save you a lot of stress.
How much admin work is involved?
Umbrella companies need almost no admin. Limited companies come with more work and legal duties.
When you work through an umbrella service, you just send timesheets or approve hours. They take care of payroll, payslips, taxes, and HMRC reporting.
Running a limited company means opening a business bank account, sending invoices, doing VAT returns, keeping accounts, and filing company tax returns. Most contractors use an accountant to help, but there’s still admin to do.
You’ll also need to stay on top of deadlines. Late filing can lead to fines.
Which option suits you best?
If you’re inside IR35
Go with an umbrella company. You’ll avoid admin and stay compliant.
There’s no tax advantage to running a limited company inside IR35. Umbrella keeps things simple.
If you’re outside IR35
A limited company gives you more money in your pocket.
You can control your income and keep more after tax. Just make sure you’re managing your accounts or have someone doing it for you.
If you’re on short contracts
Umbrella works best for short gigs or one-off projects.
You skip setup costs and don’t have to worry about closing a company later.
If you’re planning a long-term contracting career
Setting up a limited company pays off over time.
The longer you contract, the more sense it makes to control your own company, especially if you want to build up reserves, claim expenses, and keep things lean.
If your daily rate is below £150
Stick to umbrella. The cost of running a limited company might not be worth it.
Between accountancy fees and Companies House duties, the overheads can cancel out any gain at lower rates.
If you want to keep it hassle-free
Umbrella wins for ease.
No invoices. No deadlines. Just clock in and get paid.
If you want full control
A limited company puts you in the driver’s seat.
From how you get paid to what you claim, it’s all up to you. But you need to stay sharp on the rules.
Still unsure? Use this quick checklist
| Question | If yes, choose… |
|---|---|
| Are you inside IR35? | Umbrella |
| Are you new to contracting? | Umbrella |
| Is your rate under £150/day? | Umbrella |
| Do you want employment benefits? | Umbrella |
| Are you outside IR35? | Limited Company |
| Do you want tax flexibility? | Limited Company |
| Do you want to build long-term reserves? | Limited Company |
| Are you confident handling accounts or using an accountant? | Limited Company |
Pick based on where you are right now. You can always switch later.
Bottom line
An umbrella company is great if you want to get paid without stress, especially if your contract is short or caught by IR35.
A limited company makes more sense if you’re outside IR35, want to keep more of your income, and don’t mind the extra admin.
One isn’t better than the other. They’re just built for different kinds of contractors. Choose the one that fits your setup, then stick with it until things change.
