If you're a contractor in the UK in 2026, you've got two real options: work through an umbrella company, or run your own limited company. Which is better for you depends on whether your contracts are inside or outside IR35, how hands-on you want to be with admin, and how long you plan to keep contracting. This guide walks through both, with worked take-home figures at three day rates so you can see where you'd land.
The 60-second answer
Inside IR35 engagements: umbrella is almost always simpler and delivers the same take-home as running a limited company under the deemed-payment rules. Outside IR35: running your own limited company is meaningfully better because you can use salary and dividends and retain profit – at most day rates the difference is five-figure annually. If your portfolio is a mix of inside and outside IR35, you often end up with both: a limited company for outside work and an umbrella for specific inside engagements. If you're not contracting and comparing sole trader vs limited company, that's a different question with its own guide.
How an umbrella company works
An umbrella company employs you. Your contract to deliver services is between your end client (or their agency) and the umbrella, not between the client and you. You're an employee of the umbrella for the duration of your assignment, which means PAYE income tax, employee National Insurance, holiday pay, sick pay entitlement, and statutory employment rights.
The money flow is straightforward. The client pays the agency. The agency pays the umbrella the "assignment rate", which is usually the headline day rate times the days worked. The umbrella deducts its margin (typically 5% or a flat weekly fee of £20–£35), the employer's National Insurance (15% above the £5,000 secondary threshold), the Apprenticeship Levy (0.5% where the umbrella's pay bill exceeds £3 million – almost always), and any pension contributions. What's left is your gross salary, which is then subjected to PAYE income tax and employee NI. The net arrives in your bank account.
Two things are worth being clear about. First, the "employer's costs" on your payslip are nominally the umbrella's expense, but in reality they come out of the assignment rate the client pays, so they reduce your take-home. Second, because you're a PAYE employee in the umbrella's eyes, your tax code, tax band, and any student loan repayments are applied just like an ordinary job – HMRC doesn't know or care whether your next assignment is with the same umbrella or a different one.
Umbrella companies vary in quality. Use an FCSA-accredited one, check them against Companies House, and read your payslip carefully each month. If something looks off – an unexpected deduction, a changed employer name, a sudden "bonus" you didn't earn – treat it as a warning sign.
How contracting through your own limited company works
You incorporate a limited company (commonly called a "personal service company" or PSC in the contractor world), and that company contracts with the agency or end client. The company invoices for your work, receives the payment into a business bank account, and you extract the profit as some mix of salary and dividends.
Day-to-day, you're a director and shareholder of the company. You typically pay yourself a small salary (often the £12,570 Personal Allowance, sometimes the £5,000 secondary threshold to minimise employer's NI), and the remainder comes out as dividends from post-tax profits. The company pays Corporation Tax at 19% on profits up to £50,000, 25% main rate above £250,000, and a marginal effective rate in between. The dividends are then taxed in your hands at 10.75% basic, 35.75% higher, and 39.35% additional rate for 2026/27.
The admin is real. Annual statutory accounts, a CT600 Corporation Tax return, a confirmation statement, monthly PAYE RTI submissions if you take salary, quarterly VAT returns if you're over the £90,000 threshold, and your own personal Self Assessment. Most contractors engage a specialist accountant for £80–£150 a month, which includes all of the above plus IR35-specific advice. Once you've formed your limited company, the first 30 days have a predictable checklist worth following.
IR35: what it is and why it changes everything
IR35, now technically the "off-payroll working rules", exists because HMRC thinks some contractors using limited companies are really "disguised employees" who should pay income tax and employee NI like any other worker. The rules test whether, if you ignored the intermediary company, the relationship between you and the end client would look like employment.
Three bits of recent history matter. In April 2017, public sector clients became responsible for determining the IR35 status of their contractors. In April 2021, the same obligation landed on medium and large private sector clients. From 6 April 2025, the small-company exemption thresholds rose significantly: a client is classified as "small" (and so you determine your own status) only if it meets at least two of turnover £15m or less, balance sheet £7.5m or less, or 50 or fewer employees. That widened the group of clients who count as small and let their contractors self-determine.
The status test itself is a judgement call across factors including substitution (can you send someone else to do the work?), control (how much does the client dictate how and when you work?), and mutuality of obligation (are both sides obliged to provide and accept ongoing work?). HMRC's Check Employment Status for Tax (CEST) tool on gov.uk walks through the factors and returns an indicative decision, though it's not binding. For any contract worth more than a few thousand pounds, an IR35 review by a specialist is cheap insurance.
If you're inside IR35 and the client is medium-sized or larger, the fee-payer (usually the agency) applies PAYE to your deemed payment before paying your limited company. The company receives a net amount, and there's no further Corporation Tax on that slice. If the client is small, you apply the original IR35 rules yourself and pay the deemed tax from inside the company.
Take-home comparison: worked examples
Below are illustrative take-home figures at three day rates, for a 225-working-day year (which is a common planning assumption accounting for holiday, sickness, and gaps between contracts). Standard assumptions:
- Umbrella margin: 5% of assignment rate.
- Limited company salary: £12,570 (uses full Personal Allowance).
- No Employment Allowance (single-director company).
- No pension contributions (these can shift the maths significantly – covered below).
- No VAT registration implication (below or above the £90,000 threshold depending on rate; VAT is cost-neutral to VAT-registered clients so it doesn't change take-home).
- Income tax and NI at 2026/27 rates; dividend tax at 10.75% / 35.75% / 39.35%; employer's NI 15% above £5,000.
- Umbrella take-home is the same inside or outside IR35 because the umbrella treats you as employee in both cases.
All figures rounded to the nearest £500 for legibility.
| Day rate × 225 days | Umbrella (any IR35 status) | Limited, outside IR35 | Limited, inside IR35 |
|---|---|---|---|
| £400/day (£90,000) | £54,000 | £60,500 | £54,000 |
| £600/day (£135,000) | £73,000 | £83,500 | £73,000 |
| £800/day (£180,000) | £91,500 | £103,500 | £91,500 |
Illustrative only. Rounded to the nearest £500. Use HMRC's Check Employment Status for Tax tool and a contractor-focused take-home calculator for your specific figures. Personal Allowance tapers above £100,000 adjusted net income, which affects the £800/day limited-outside figure.
The headline pattern is consistent at every rate: limited- outside-IR35 is roughly £6,500–£12,000 a year ahead of umbrella or limited-inside, and umbrella and limited-inside come out effectively equal. The gap grows in absolute terms but stays roughly proportional as the day rate climbs. The implication is clear: for inside-IR35 work, the admin burden of a limited company buys you nothing on the tax side; for outside-IR35 work, it's worth the fees and the paperwork. VAT registration becomes relevant at roughly £400/day since an annual contract crosses the VAT threshold of £90,000.
Flexibility, admin, and control compared
Umbrella is simple in a way limited just isn't. You sign up with the umbrella, give them your client details, and your pay arrives after PAYE deductions. There's no Companies House, no Corporation Tax return, no confirmation statement, no payroll to run, no VAT to monitor. Your admin load is a monthly payslip to file and a P60 at year end. For a short-term contract or a first foray into contracting, that simplicity is worth a meaningful amount.
The trade-off is control. The umbrella decides when you get paid (usually weekly, sometimes monthly), how pension contributions are structured, which expenses are reclaimable (spoiler: not many), and what paperwork you see. Limited companies put you in charge of all those decisions, at the cost of having to actually make them.
Limited also lets you retain profit inside the company. If you have a great year and don't need all the income, you can leave it in as retained profit and extract it in a future lower-income year. That smoothing ability – which an umbrella structurally can't provide – is particularly valuable for contractors with lumpy earnings or those planning to take a sabbatical.
Expenses you can claim under each
Umbrella expenses are heavily restricted. The Supervision, Direction, or Control rules introduced in 2016 blocked most travel and subsistence claims for umbrella workers. In practice, you can only claim expenses the end client specifically reimburses you for under contract, plus a narrow set of non-SDC items. Don't build a take-home comparison that relies on umbrella expenses; they rarely help.
Limited company expenses are broader but not unlimited. Your company can claim the usual business costs: mobile phone and line if in the company's name, laptops and kit, software subscriptions, home office "use of home" allowance or specific proportion of utility bills, professional indemnity insurance, accountancy fees, and business travel between sites that aren't your normal workplace. Training courses relevant to your current trade, professional subscriptions that HMRC has approved, and health screening within limits are also claimable.
The common trap is claiming personal costs through the company. Subscription services you'd have anyway, clothing that isn't a uniform, normal commute costs, and entertaining clients beyond reasonable hospitality all fail HMRC's "wholly and exclusively for business" test. When in doubt, ask your accountant – they see the edge cases every week.
Pension contributions and tax-efficient strategies
This is where a limited company really shines for contractors serious about long-term wealth building. Employer pension contributions from your limited company are deductible against Corporation Tax, aren't counted as your personal income, and grow tax-free inside a pension wrapper. Contributions are limited by the annual allowance of £60,000 per year for 2026/27, and you can carry forward unused allowance from the three previous tax years.
A contractor on £600/day earning £135,000 a year who contributes £40,000 to a SIPP from the company saves Corporation Tax on that £40,000 (roughly £7,600 at the marginal rate), defers the income tax until retirement, and grows the pot tax-free. Umbrella workers can also contribute to a pension via salary sacrifice, but the umbrella's employer scheme is usually more restrictive and doesn't offer the flexibility of the SIPP route.
One catch: the tapered annual allowance for high earners reduces the £60,000 limit where adjusted income exceeds £260,000, down to a minimum of £10,000 at £360,000+ of adjusted income. If you're in this bracket, pension planning needs an accountant who knows the tapering rules.
When to choose umbrella
Umbrella is the right call in several specific situations. All your contracts are inside IR35 and you don't expect that to change – the tax maths favours umbrella's simplicity over the limited company's admin. Your contracts are short (weeks or a few months) and the cost of setting up and winding down a limited company would eat the tax benefit. You're contracting as a temporary bridge between permanent roles and don't plan to stay in contracting longer than 12–18 months. You simply hate admin and are happy to pay for simplicity.
Umbrella also works well for contractors early in their career who aren't yet sure about day rates, demand, or how long they'll be contracting. It removes the "what if I incorporate and then go back to permanent in six months?" question.
When to choose limited
Limited is the right call if most or all of your contracts are outside IR35 – the tax saving is substantial and consistent. You plan to contract for several years. You want to make meaningful employer pension contributions and smooth income across tax years. You want genuine expense flexibility. You're aiming at higher day rates where retained profit becomes meaningful.
Limited is also the right structure if you might expand beyond contracting – picking up retained clients, building a product, or bringing on a co-founder or employee. The company is already the right vehicle for any of those directions.
How to switch from umbrella to limited
Order matters. The usual flow:
- Form the company. Incorporate online with Companies House (£100 since 1 February 2026). Choose a name, SIC code (most contractors use 62020 or 70229), and registered office.
- Open a business bank account. Challenger banks (Starling, Tide) onboard in hours; high-street banks take longer. You'll need the certificate of incorporation to apply.
- Register for Corporation Tax with HMRC. Automatic via Companies House for most incorporations, confirm within three months of starting to trade.
- Decide on VAT registration. Voluntary registration is often sensible at typical contractor day rates; your B2B clients reclaim the VAT you charge.
- Set up payroll. Register as an employer with HMRC, start a PAYE scheme, and run RTI monthly – or let a contractor accountant handle it.
- Notify the agency. Give your new company details to the agency well before your umbrella contract ends. Most agencies have a standard PSC onboarding pack.
- Transfer when a contract naturally ends. Mid-contract switches are possible but friction-heavy; agency, client, and umbrella all have to agree. A natural contract boundary is much easier.
- Get IR35 reviews done. Before signing the first contract through the limited company, have the contract and working practices reviewed against IR35. If the engagement is inside, think carefully about whether the limited company is still worth running for that contract.
Frequently asked questions
The questions I get most often from contractors, answered plainly.
If all my contracts are inside IR35, is there any point in having a limited company?
Rarely. Under off-payroll working rules, an inside-IR35 engagement is taxed as employment income at source, so the tax advantages of a limited company largely disappear. You keep the admin – accounts, Corporation Tax return, confirmation statement, PAYE – without the tax saving. Most contractors working exclusively inside IR35 use an umbrella instead. The main reasons to keep a limited company anyway are if you occasionally take outside-IR35 work, you want to retain profit in the company for future lower-income years, or you plan to make substantial employer pension contributions.
Can I move from umbrella to limited company mid-contract?
In theory yes, but it's friction-heavy. The agency or end client usually needs to terminate the contract with the umbrella and issue a new one with your limited company, which means a new Statement of Works, a new IR35 determination, and a new onboarding. Many agencies allow it between contracts but not mid-assignment. If you're planning to switch, time the move to a natural contract end. Register the limited company well in advance so it's ready to invoice from day one – our step-by-step set-up guide covers the incorporation side.
Who actually decides whether I'm inside or outside IR35?
Under the off-payroll working rules, the end client determines status – not you, not the agency. For public sector, medium-sized, and large private sector clients, the client must issue a Status Determination Statement (SDS) setting out the decision and its reasoning. Small private sector clients are exempt, and in that case you (as the limited company) determine your own status under the original IR35 rules. You can dispute a client's SDS through the statutory client-led disagreement process if you believe it's wrong.
What expenses can I claim through an umbrella company?
Very few, under current rules. Supervision, direction, or control (SDC) rules effectively block most travel and subsistence claims for umbrella workers since 2016. The only expenses you can usually claim are those specifically reimbursed by the end client under the contract, or those properly incurred outside SDC. Laptops and kit bought for specific assignments can sometimes be claimed, but the scope is narrow. If expenses matter to your take-home, this is one of the clearest cases for using your own limited company instead.
Can I have both a limited company and work through an umbrella?
Yes. Many contractors keep a limited company for outside-IR35 work and use an umbrella for specific inside-IR35 engagements. The two don't conflict. You'll need to keep the accounts straight – the limited company only records the outside-IR35 contracts; the umbrella handles the inside-IR35 pay separately through PAYE on your personal tax record. Your Self Assessment pulls both sides together at year end. An accountant who specialises in contractors is worth the fee if you're running both structures.
How much does a contractor accountant cost?
A specialist contractor accountant typically charges between £80 and £150 a month (plus VAT), covering monthly payroll, Corporation Tax return, annual accounts, confirmation statement, and usually your personal Self Assessment. That's £960 to £1,800 a year. Cheaper generalist accountants exist but often don't know IR35 or the specific expense rules contractors need. Crunch, inniAccounts, and SJD are well-known specialists. Get fixed-fee quotes rather than hourly; contractor tax is volume work and should be priced like it.
Can my limited company pay into a pension for me?
Yes, and it's one of the strongest tax arguments for a limited company. Employer pension contributions are a deductible business expense for Corporation Tax, aren't counted as your personal income, and use your Pension Annual Allowance of £60,000 per year. A contractor limited company routinely contributes £30,000 to £60,000 a year into the director's SIPP, saving Corporation Tax at 19–25% plus deferring income tax until retirement. Be aware of the tapered annual allowance if your adjusted income exceeds £260,000, which tapers the allowance down to a minimum of £10,000.
What's the mini-umbrella company fraud I've read about – how do I avoid it?
Mini-umbrella fraud is a scheme where scammers shard contractor payroll across hundreds of tiny, short-lived companies to abuse the Employment Allowance and Flat Rate Scheme, often at the expense of low-paid workers who don't realise. HMRC has targeted it aggressively. Avoid it by using only FCSA-accredited umbrellas, checking whether the umbrella is registered for PAYE in its own name, reading your payslips carefully (suspect if your employer name changes), and reporting concerns to HMRC's fraud hotline. If a deal looks too good for take-home, it almost certainly is.
Authoritative sources: gov.uk IR35 overview, HMRC's CEST tool, FCSA, Employment Agency Standards Inspectorate.
