On the same contract, a limited company outside IR35 usually pays a UK contractor more than an umbrella company, by about 4,316 pounds a year on 80,000 pounds of billings in 2026/27. Inside IR35, the gap almost disappears. This guide shows the full maths for both routes, then helps you decide which one fits your contract, your rate and how much admin you want.
Search intent, in one line: you want to know which route leaves you with more take-home pay, and whether the extra money is worth the extra work. You get that answer in this section, with the detailed workings below if you want to check them.
Which pays more, an umbrella company or a limited company?
Outside IR35, a limited company pays more because you take a small salary plus dividends, and dividends carry no National Insurance. Through an umbrella, everything is taxed as employment income, and employer National Insurance and the margin come out of your assignment rate first. Inside IR35, both routes are taxed like employment, so umbrella usually wins on simplicity.
That short answer hides three moving parts. First, IR35 status decides whether the limited company advantage even exists. Second, your day rate decides how big the gap is, because fixed costs like accountancy and umbrella margins bite harder at lower rates. Third, the 2026/27 dividend tax rise narrowed the gap. From 6 April 2026, dividend tax is 10.75 percent in the basic rate band and 35.75 percent in the higher rate band, up 2 points on the year before, with a 500 pound dividend allowance. The official rates and allowances are published in HMRC’s Budget 2025 rates annex.
Rates last reviewed: October 2026. Figures below use England, Wales and Northern Ireland tax bands for 2026/27. Scotland sets its own income tax bands for salary, so Scottish contractors should rerun the salary side with Scottish rates.
How does an umbrella company pay you?
An umbrella company employs you and pays you through PAYE. The agency or client pays the umbrella an assignment rate. The umbrella deducts its employment costs and its margin, then pays the rest as your gross salary, minus income tax and employee National Insurance.
GOV.UK’s guide, Working through an umbrella company, sets out your employment rights, holiday pay options and what your payslip and reconciliation statement should show.
The point most contractors miss is that the assignment rate is not your salary. Before you see a payslip, the umbrella takes:
- Employer National Insurance at 15 percent on pay above the 5,000 pound secondary threshold
- The apprenticeship levy, normally 0.5 percent of gross pay
- Its margin, commonly 20 to 30 pounds per week worked
- Any employer pension contribution, if you stay enrolled
Only what is left becomes your gross pay. That is why two contractors on the same day rate can take home different amounts if one has been quoted a rate that already includes these employment costs and the other has not. Always ask whether a quoted rate is the assignment rate or the gross pay rate.
Tip: From 6 April 2026, new PAYE rules for labour supply chains make the agency, or the end client if there is no agency, responsible for making sure PAYE is operated correctly when an umbrella is involved. See HMRC’s PAYE rules for supply chains that include umbrella companies. It is another reason to use a reputable, transparent umbrella and to check every payslip against your assignment rate.
How does a limited company pay you?
Your limited company invoices the client, deducts allowable costs, and pays corporation tax on its profit. You then take money out as salary and dividends. Most single-director contractors take a salary of 12,570 pounds, matching the personal allowance, so it carries no income tax and no employee National Insurance.
The company still pays employer National Insurance of 1,135.50 pounds on that salary, because 15 percent applies to the 7,570 pounds above the 5,000 pound secondary threshold. A sole director company normally cannot claim the Employment Allowance, so budget for that cost.
The rest comes out as dividends from post-tax profit. Dividends carry no National Insurance at all, which is the core of the limited company advantage. The trade-off is corporation tax first: 19 percent on profits up to 50,000 pounds, 25 percent above 250,000 pounds, and marginal relief in between, which works out at an effective 26.5 percent on the slice between those limits. You also carry the admin: company accounts, a corporation tax return, payroll, dividend paperwork, and usually an accountant at 1,200 to 1,800 pounds a year.
For the salary and dividend mix itself, read our guide to salary vs dividends for limited company directors. To test your own salary figure, use LancerBill’s UK income tax calculator.
Worked example: 80,000 pounds of billings in 2026/27
Assumptions, stated in full so you can rerun them: one contractor in England, 400 pounds a day for 200 days, so 80,000 pounds of assignment income or company revenue. No pension contributions, no student loan, no other income. Umbrella margin 25 pounds a week for 48 weeks, so 1,200 pounds a year. Limited company costs 2,000 pounds a year (accountancy, insurance and software). Contract outside IR35 for the limited company route. Income tax bands are the standard 2026/27 bands on GOV.UK’s income tax rates page: 12,570 pounds tax-free, 20 percent to 50,270 pounds, 40 percent above that.
Umbrella route, step by step
Step 1, find gross pay. Gross pay plus employer National Insurance plus the levy plus the margin must equal 80,000 pounds. Gross pay works out at 68,874 pounds. Employer National Insurance is 15 percent of 63,874 pounds (gross pay minus the 5,000 pound threshold), which is 9,581 pounds. The apprenticeship levy at 0.5 percent is 344 pounds. Add the 1,200 pound margin: 68,874 + 9,581 + 344 + 1,200 = 80,000 pounds, allowing for rounding.
Step 2, income tax on 68,874 pounds. Taxable income after the 12,570 pound allowance is 56,304 pounds. The first 37,700 pounds at 20 percent is 7,540 pounds. The remaining 18,604 pounds at 40 percent is 7,442 pounds. Total income tax: 14,982 pounds.
Step 3, employee National Insurance. Eight percent on the 37,700 pounds between 12,570 and 50,270 pounds is 3,016 pounds. Two percent on the 18,604 pounds above 50,270 pounds is 372 pounds. Total: 3,388 pounds.
Step 4, take-home pay: 68,874 – 14,982 – 3,388 = 50,505 pounds.
Limited company route, step by step
Step 1, company profit. Revenue 80,000 pounds, minus salary 12,570 pounds, minus employer National Insurance 1,136 pounds, minus costs 2,000 pounds, leaves a profit of 64,295 pounds.
Step 2, corporation tax. At the main rate, 25 percent of 64,295 pounds is 16,074 pounds. Marginal relief is (250,000 – 64,295) x 3/200, which is 2,786 pounds. Corporation tax payable: 13,288 pounds.
Step 3, dividends. Post-tax profit available is 64,295 – 13,288 = 51,006 pounds, paid as a dividend on top of the 12,570 pound salary.
Step 4, dividend tax. Your salary uses your personal allowance, so your dividends stack from the bottom of the bands. The first 500 pounds is covered by the dividend allowance at 0 percent. The next 37,200 pounds, filling the rest of the basic rate band, at 10.75 percent is 3,999 pounds. The remaining 13,306 pounds at the higher rate of 35.75 percent is 4,757 pounds. Total dividend tax: 8,756 pounds. There is no National Insurance on the salary at this level and none on dividends.
Step 5, take-home pay: 12,570 + 51,006 – 8,756 = 54,820 pounds.
| Item | Umbrella | Limited company (outside IR35) |
|---|---|---|
| Assignment income / company revenue | 80,000 pounds | 80,000 pounds |
| Employer NI, levy and margin / company costs | 11,126 pounds | 3,136 pounds plus corporation tax |
| Corporation tax | None | 13,288 pounds |
| Personal tax and employee NI | 18,370 pounds | 8,756 pounds dividend tax |
| Annual take-home pay | 50,505 pounds | 54,820 pounds |
| Share of billings kept | 63.1 percent | 68.5 percent |
On these assumptions the limited company leaves you 4,316 pounds a year better off. That is real money, but it is not the 10,000 pound gap older comparisons promised. Higher dividend tax and higher corporation tax have narrowed it, which is exactly why you should run your own rate rather than trust a headline.
Watch out: If this contract is inside IR35, do not use the limited company column. Inside IR35, your company income is taxed as deemed employment income, broadly like the umbrella route, but you still pay accountancy and company costs on top. Most inside IR35 contractors in a limited company end up slightly worse off than umbrella, with more admin. Our IR35 explained guide walks through who decides your status and how to challenge a determination.
What changes the answer at your day rate?
Three levers move the gap: your rate, how much profit you leave in the company, and pensions. Fixed costs are a bigger share of a small income, so at lower day rates the accountancy bill and the umbrella margin both bite harder. Money retained in the company is taxed only at corporation tax rates until you draw it.
Contractors who do not need every pound each month can time dividends across tax years and keep more income in lower bands. Pensions matter too. A company pension contribution is deductible for corporation tax and carries no National Insurance, and many umbrellas offer salary sacrifice pensions. A large contribution can change which route wins, so include it in any serious comparison.
Use LancerBill’s monthly rate calculator to turn your day rate into monthly and annual figures, then compare that with the take-home pattern above. If you are converting between contract and permanent pay, our day rate to salary guide for UK contractors shows the 220 working day method in full.
Decision framework: choose in five questions
Most comparison pages stop at take-home pay. Use this five-question framework instead, in order. A no on question 1 usually settles the choice before money enters it.
| Question | If yes | If no |
|---|---|---|
| 1. Is the contract genuinely outside IR35, with a Status Determination Statement to match? | Limited company stays on the table | Choose umbrella in most cases |
| 2. Will you contract for at least 12 months at this level? | Company set-up and accountancy costs spread thin | Umbrella avoids set-up and closing costs for a short stint |
| 3. Is your annual billings figure high enough that 1,500 to 2,000 pounds of company costs is under 3 percent of revenue? | Limited company maths usually wins | Model both routes carefully, the gap may be small |
| 4. Do you want employment rights, holiday pay and auto-enrolment handled for you? | Umbrella gives you employee status | Limited company means arranging your own cover and pension |
| 5. Are you happy running payroll, accounts deadlines and dividend paperwork, or paying an accountant to do it? | Limited company admin is manageable | Umbrella is the low-admin default |
Rule of thumb: outside IR35, long contract, higher rate, low appetite for spending every pound each month points to a limited company. Inside IR35, short contract, or a strong preference for simple employed pay points to an umbrella.
What are the hidden costs and risks on each side?
On the umbrella side, the main risks are opacity and non-compliance. Check that the margin is the only variable deduction, that holiday pay matches your key information document, and that no part of your pay arrives as a loan or disguised remuneration scheme.
Those schemes can leave you with a large unexpected tax bill. On the limited company side, the risks are IR35 enquiries, late filing penalties, and taking dividends when there is not enough post-tax profit to cover them, which makes the payment unlawful. Both routes need clean invoicing and records. If you invoice clients directly, LancerBill’s invoice generator creates a professional invoice with no signup, so your paperwork matches the income your accounts report.
Tip: Whichever route you choose, keep a separate tax reserve account. Umbrella PAYE feels automatic, but a wrong tax code can still leave a bill. Limited company directors should move the corporation tax and expected dividend tax aside monthly, not at year end.
Key takeaways
- Outside IR35 on 80,000 pounds of billings in 2026/27, a limited company paid about 54,820 pounds vs about 50,505 pounds through an umbrella in our worked example, a gap of 4,316 pounds.
- Inside IR35, both routes are taxed like employment, so umbrella is usually cheaper and simpler once company costs are added.
- The umbrella assignment rate is not your salary. Employer National Insurance, the apprenticeship levy and the margin come out first.
- The limited company edge comes from dividends carrying no National Insurance, partly offset by corporation tax and the higher 2026/27 dividend rates of 10.75 and 35.75 percent.
- Decide in order: IR35 status first, then contract length, then rate, then employment rights and admin appetite.
Frequently asked questions
How much does an umbrella company charge?
Most compliant umbrellas charge a fixed margin of about 20 to 30 pounds per week worked, deducted from the assignment rate before your gross pay is calculated. In our worked example, 25 pounds a week for 48 weeks came to 1,200 pounds a year. Ask for the margin in writing and check it on every payslip.
Can I use a limited company if my contract is inside IR35?
Yes, but there is usually little benefit. Inside IR35 income through your company is taxed as deemed employment income, so your take-home is broadly the same as umbrella pay, while you still pay accountancy and company running costs. That is why most inside IR35 contractors choose an umbrella instead.
Do umbrella workers get holiday pay and a pension?
Yes. As an employee of the umbrella, you have employment rights, including paid holiday and auto-enrolment into a workplace pension if you are eligible. Holiday pay is either rolled up into each payment or accrued and paid when you take leave. Check which method your umbrella uses in your key information document.
Why has the limited company advantage got smaller?
Three changes narrowed it: corporation tax rose to 19 to 25 percent from April 2023, the dividend allowance fell to 500 pounds, and dividend tax rose by 2 points from April 2026 to 10.75 percent in the basic band and 35.75 percent in the higher band. The advantage is still real outside IR35 at higher rates, but it is smaller than older comparisons suggest.
Can I switch from umbrella to a limited company mid-contract?
Usually only at a natural break, and only if the agency and client agree and the contract’s IR35 status supports it. A change of payment route does not change your IR35 status. Get the status determination in writing first, then set up the company, payroll and invoicing before the new arrangement starts.
This guide is for general information only and is not financial, tax or legal advice. Tax rules change and your outcome depends on your IR35 status, expenses, pension and other income, so take advice from a qualified contractor accountant before you commit to either route.