Part of our complete guide to IR35 & contractor tax.
Two very different setups
An umbrella company employs you, usually on behalf of a recruitment agency or client, handling PAYE tax and National Insurance on your earnings, and taking a margin for doing so. A limited company is a business you own and run yourself, with its own tax obligations, Corporation Tax, VAT if applicable, and your own self assessment on top.
When umbrella usually wins
- Inside-IR35 contracts. If the engagement is inside IR35 anyway, see our guide on what IR35 is, your limited company loses most of its usual tax efficiency, so running one brings extra admin without the corresponding tax benefit
- Short-term or occasional contracting. If you're not planning to contract consistently, the setup cost and ongoing admin of a limited company may not be worth it for a one-off engagement
- Wanting zero admin. An umbrella company handles your tax compliance for you, in exchange for its fee, trading a small cost for simplicity
When limited company usually wins
- Outside-IR35 contracts. Here the full tax efficiency of salary plus dividends applies, see our inside vs outside IR35 comparison for the real numbers
- Ongoing, longer-term contracting. The setup effort pays off more clearly if you're contracting regularly rather than for a single short engagement
- Wanting more control over timing of dividends, pension contributions, and other tax planning that a limited company structure enables
Key point: The decision isn't really "umbrella vs limited company" in the abstract, it's "what's my IR35 status on this specific contract, and does that make a limited company's extra admin worth it." Settle the IR35 question first.
What a limited company actually involves
Company formation, a business bank account, bookkeeping, annual accounts, Corporation Tax, and your own self assessment, see our company formation service and limited company accounts service for what's involved and what we handle for you.
Not sure which setup suits your contract? Book a free consultation and we'll talk through your specific situation and IR35 status before you decide.
Frequently asked questions
What is an umbrella company?
A company that employs you on behalf of your recruitment agency or client, handling PAYE tax and National Insurance on your pay, and typically charging a margin or fee for the service.
When does an umbrella company make more sense than a limited company?
Mainly for inside-IR35 contracts, where the limited company's usual tax efficiencies don't apply anyway, or for short-term or occasional contracting where the admin of running a company isn't worth it.
Does a limited company always pay more take-home?
Only for outside-IR35 work. For inside-IR35 contracts, the take-home difference between umbrella and limited company narrows considerably, since the usual company tax efficiencies are restricted either way.
What admin does a limited company involve that an umbrella avoids?
Company formation, business bank account, bookkeeping, VAT if applicable, annual accounts, Corporation Tax and your own self assessment, an umbrella company handles equivalent obligations on your behalf for a fee.