Comparison · Contractor 2025/26
Limited Company vs Umbrella
The single biggest decision for a UK contractor. Get this wrong and you lose £10,000-£20,000/year in tax efficiency — or worse, fall foul of IR35.
TL;DR — 30 Second Answer
- • Outside IR35: Limited Company — 10-15% more take-home
- • Inside IR35: Umbrella — simpler, near-identical net pay
- • Short-term contract (<6 months): Umbrella — Ltd setup not worth it
- • Multiple clients, long-term, >£300/day: Limited Company
Take-Home on £500/day (220 days) — £110,000 Assignment
| Item | Ltd (Outside IR35) | Umbrella |
|---|---|---|
| Gross fees | £110,000 | £110,000 |
| Employer NI (15%) | — | −£12,500 |
| Apprenticeship Levy 0.5% | — | −£550 |
| Umbrella margin (£20/wk) | — | −£1,000 |
| Corp Tax / Income Tax + NI | ~£26,000 | ~£25,500 |
| Accountant (£130/mo) | −£1,560 | — |
| Net take-home | ~£82,400 (75%) | ~£70,450 (64%) |
Indicative only — depends on dividend strategy, pension contributions, expenses, region.
Limited Company — Pros & Cons
✓ Pros
- • Salary + dividend split — lower combined tax
- • Claim legitimate business expenses
- • Pension via employer contributions (no NI)
- • Build company reserves, sell/MVL later
- • Multiple income streams (Ltd serves several clients)
✗ Cons
- • £130-200/mo accountant fees
- • Companies House + Corp Tax + VAT admin
- • IR35 risk — full liability if reassessed
- • No employment rights (sick pay, holiday)
- • Dividend tax rates rising (8.75%/33.75%/39.35%)
Umbrella — Pros & Cons
✓ Pros
- • Zero admin — PAYE handles all tax
- • Statutory rights: holiday pay, SSP, SMP
- • Auto-enrolment pension
- • No IR35 risk — already taxed as employee
- • Easy switch between assignments
✗ Cons
- • Lower take-home (60-65% typical)
- • Employer NI + Levy from your rate
- • Margin fees £15-30/wk
- • Limited expense claims (only travel between sites)
- • Tax avoidance schemes still circulating — avoid
IR35 — The Decision Tree
- End client is small private company: You determine IR35. Use HMRC CEST tool. If outside → Ltd works.
- End client is medium/large or public sector: Client determines via SDS (Status Determination Statement). If inside → Umbrella or deemed-employee PAYE.
- «Outside IR35» factors: Right of substitution, control over how you work, financial risk, multiple clients, own equipment.
- «Inside IR35» red flags: Fixed hours, manager direction, integrated into client team, single long-term client.
When to Pick Which
- Pick Limited Company if: Outside IR35, day rate £300+, contracts > 12 months expected, multiple clients possible, comfortable with admin.
- Pick Umbrella if: Inside IR35, short contract <6 months, first contractor role, value simplicity over £, want statutory rights.
- Hybrid (split): Some contractors run Ltd for outside-IR35 work and umbrella for inside-IR35 work simultaneously.
Contractor Calculators
Calculators for this topic
Income Tax Calculator
Work out how much income tax you owe using the latest 2025/26 UK tax bands.
National Insurance Calculator
Calculate your National Insurance contributions for 2025/26.
VAT Calculator
Add or remove VAT from any amount. Supports 20%, 5% and 0% UK VAT rates.
Corporation Tax Calculator
Calculate Corporation Tax for UK limited companies for 2025/26.
Disclaimer: Calculations indicative. IR35 status determination is fact-specific — get a professional review for borderline contracts. Avoid umbrella «loan schemes» (HMRC Loan Charge).