The Short Answer
The choice between umbrella and limited company is almost entirely determined by your IR35 status:
- Outside IR35? A limited company (personal service company) will almost always pay significantly more — typically £10,000–£20,000 more per year at common day rates.
- Inside IR35? Both routes result in broadly similar take-home pay, since income is taxed as employment income either way. Umbrella is simpler and cheaper to run in this scenario.
Outside IR35, a limited company lets you take income as a mix of salary and dividends — dividends aren't subject to National Insurance and are taxed at lower rates. Inside IR35, that tax advantage disappears: you pay income tax and NI on everything regardless. The structure you use barely matters when you're inside IR35.
How Each Structure Works
Umbrella Company
An umbrella company employs you. You work at your client's site, but you are technically an employee of the umbrella. The umbrella invoices the agency or client, deducts its margin (typically £20–£30/week), calculates PAYE income tax and National Insurance, and pays you your net salary.
From 6 April 2026, the agency in the supply chain (rather than the umbrella itself) is responsible for operating PAYE on umbrella workers' pay under new government rules designed to crack down on non-compliant umbrella schemes. For contractors using mainstream umbrella providers, day-to-day pay mechanics should not change materially.
Limited Company (PSC)
You operate through your own personal service company (PSC). Your limited company invoices the client or agency, receives the payment, and you then pay yourself from the company. Outside IR35, the tax-efficient approach is to take a low salary (up to the NI threshold) and draw the remainder as dividends, which are taxed at lower rates with no National Insurance.
The Numbers: Side-by-Side Comparison (2026/27)
The figures below assume 46 working weeks per year, 5 days per week, outside IR35 for the limited company scenario. Corporation tax at 25% applies to profits above £50,000 (small profits rate 19% below £50,000).
| Day Rate | Annual Gross | Umbrella Take-Home | Ltd (Outside IR35) | Annual Difference |
|---|---|---|---|---|
| £300/day | £69,000 | ~£44,500 | ~£53,000 | +£8,500 |
| £400/day | £92,000 | ~£55,500 | ~£67,500 | +£12,000 |
| £500/day | £115,000 | ~£65,000 | ~£80,000 | +£15,000 |
| £600/day | £138,000 | ~£74,000 | ~£91,000 | +£17,000 |
| £700/day | £161,000 | ~£82,500 | ~£101,500 | +£19,000 |
Figures are estimates based on 2026/27 tax rates. They assume optimal salary/dividend split for limited company, £25/week umbrella margin, 15% employer NI rate (from April 2025), standard personal allowance of £12,570, and no other income. Use our IR35 calculator for a figure specific to your rate.
From 6 April 2026, dividend tax rates increase: the basic rate moves to 10.75% (from 8.75%) and the higher rate to 35.75% (from 33.75%). This slightly narrows the limited company advantage at higher income levels, but outside IR35 remains considerably more efficient than umbrella for most contractors.
Inside IR35: Does the Structure Matter?
When you are inside IR35, the tax efficiency of a limited company disappears. The off-payroll working rules treat your contract income as deemed employment income — you pay income tax and employee's NI as if you were on the payroll. The employer's NI (15% from April 2025) is also deducted from your rate before it reaches you.
The result is that inside IR35, umbrella and limited company take-home pay are broadly similar — typically within a few hundred pounds per year. But a limited company inside IR35 costs money to run: accountant fees of £100–£200/month, company admin, and potentially corporation tax compliance on top. This overhead with no meaningful take-home benefit makes umbrella the simpler and generally better choice when you are inside IR35.
Outside IR35: Limited Company Wins Clearly
Outside IR35, the comparison looks very different. A limited company allows you to structure your income tax-efficiently — typically taking a salary up to the primary NI threshold and drawing the remainder as dividends. Dividends are not subject to National Insurance (saving 8–12% depending on the band) and are taxed at lower rates than salary income.
What April 2026 Changes for Umbrella Workers
Two significant changes affect umbrella contractors from 6 April 2026:
1. Agency PAYE responsibility
Recruitment agencies that place workers via umbrella companies become responsible for operating PAYE directly, rather than the umbrella doing so. This is designed to eliminate non-compliant mini-umbrella schemes and aggressive tax avoidance. For contractors using reputable umbrella providers, take-home pay and the process should feel broadly similar — the change is primarily about who is legally responsible for the PAYE deduction in the supply chain.
2. Small company threshold increases
The threshold for what constitutes a "small" company rises from 6 April 2026 — meaning more clients now qualify as small and IR35 responsibility shifts back to contractors. If you have been inside IR35 because a medium-sized client made that determination, but they now qualify as small, you can self-assess your own status. This could be a significant opportunity for some contractors. See the full detail in our April 2026 threshold changes guide.
Which Is Right for You?
| Your situation | Recommended structure | Why |
|---|---|---|
| Outside IR35, experienced contractor | Limited company | Significant tax efficiency — £10,000–£20,000/yr advantage |
| Inside IR35, medium/large client | Umbrella | Simpler, cheaper to run, no meaningful tax disadvantage vs Ltd |
| New to contracting, uncertain IR35 status | Umbrella (short term) | Low admin, no commitments while you assess your longer-term situation |
| Short-term single contract, inside IR35 | Umbrella | Not worth the cost and admin of setting up a limited company |
| Multiple contracts, outside IR35 | Limited company | Maximum tax efficiency across multiple engagements |
| Client newly reclassified as small (April 2026) | Review — Ltd likely better | Self-assess your IR35 status — could unlock limited company efficiency |
If an umbrella company promises take-home pay significantly higher than the figures shown here (e.g., 85–90%+ retention), this is almost certainly a non-compliant scheme. These arrangements face HMRC crackdowns and contractors who use them can be held personally liable for unpaid tax. Stick to well-known, FCSA-accredited providers.