The Question Every New Contractor Faces
When you start contracting, one of the first decisions you'll make is how to structure your work: through your own limited company, or through an umbrella company. Both are legitimate, widely-used options — but they produce meaningfully different take-home pay figures, and the right choice depends on your circumstances.
In this article we cut through the noise and run the actual numbers for 2026/27 so you can make an informed decision.
Important: If your contract is determined inside IR35, the limited company tax advantage largely disappears. In that case, umbrella is often simpler with minimal financial penalty. The comparison below applies primarily to outside IR35 engagements.
How Each Structure Works
Limited Company (Outside IR35)
You invoice the client through your own limited company. The company receives the gross fee, pays Corporation Tax at 19% (small profits rate), and you draw an optimal combination of salary and dividends. The salary is set at the personal allowance (£12,570) to avoid income tax and minimise National Insurance. The remainder is paid as dividends, which are taxed at lower rates than salary. Your accountant handles the annual accounts and self-assessment — typically £800–£1,500/year.
Umbrella Company
You become an employee of the umbrella company. They invoice the client, deduct their margin (usually £15–£30/week), deduct employer NI at 15% from your rate, and pay you a salary via PAYE. You pay income tax and employee NI on that salary. There is no Corporation Tax, no dividend planning, and no accountancy fees — but also no tax efficiency. The umbrella handles all payroll administration.
The Numbers: Side-by-Side Comparison
The table below shows estimated annual take-home pay at common day rates, assuming 18 working days per month (216 days/year), £3,000 expenses for the limited company, and a typical umbrella margin of £20/week. 2026/27 tax rates throughout.
| Day Rate | Ltd Company (Outside IR35) | Umbrella (Inside IR35) | Ltd Advantage |
|---|---|---|---|
| £300/day | £43,600 | £35,200 | +£8,400 |
| £400/day | £57,100 | £45,700 | +£11,400 |
| £500/day | £69,500 | £55,800 | +£13,700 |
| £600/day | £81,400 | £65,300 | +£16,100 |
| £700/day | £92,900 | £74,200 | +£18,700 |
| £800/day | £103,700 | £82,400 | +£21,300 |
The limited company advantage grows with day rate because more income enters the Corporation Tax / dividend system rather than PAYE. At £500/day the difference is over £13,000 per year — enough to more than justify accountancy fees and the administrative overhead of running a company.
Use our IR35 calculator to model your exact figures including your specific expenses and days worked.
What About Accountancy Costs?
Running a limited company requires a qualified accountant. Typical costs for a straightforward contractor limited company are £800–£1,500 per year for annual accounts, corporation tax return, and self-assessment. Many accountants bundle payroll and VAT registration too. Subtract this from the "Ltd Advantage" column above and the limited company is still substantially ahead at any rate above £300/day.
Pros and Cons at a Glance
✓ Limited Company
- Significantly higher take-home pay
- Can claim allowable business expenses
- Employer pension contributions reduce corp tax
- Professional credibility with some clients
- Full control of company finances
- Can retain profit in company for lower-income years
Umbrella Company
- No admin — fully managed payroll
- No accountancy fees
- Employment rights (holiday pay, SSP)
- Better suited to inside IR35 contracts
- Good for short engagements or testing contracting
- No Companies House filing obligations
When Umbrella Makes Sense
Despite the financial disadvantage, there are scenarios where umbrella is the right choice:
- You're inside IR35. The limited company tax benefit evaporates when inside IR35 because income is taxed as employment. The umbrella's simplicity is worth more than the marginal difference.
- Short-term or trial contracts. Setting up and closing a limited company has costs and administrative overhead. For a 3-month contract, the maths often doesn't work.
- You're new to contracting. Understanding PAYE through an umbrella first gives you time to understand the market before committing to company structure.
- Your client mandates it. Some large clients and agencies now only engage umbrella workers to avoid IR35 liability. If the role is right, the trade-off may be worth it.
The Verdict for 2026
For contractors working outside IR35 at day rates of £350 or above, a limited company will almost always deliver materially better take-home pay — typically £10,000–£20,000 more per year at common rates. The administrative burden is manageable with a good accountant, and the costs are modest relative to the tax saving.
For inside IR35 contracts, or for very short engagements, umbrella remains a sensible and legitimate choice. The real answer is: know your IR35 status first, then choose your structure accordingly.
When negotiating an inside IR35 rate, remember that the gross rate needs to be 20–25% higher than an outside IR35 equivalent to deliver the same net pay. Use the calculator below to find the exact uplift you need.
Model your own numbers
Outside IR35 (Ltd Co), inside IR35 (umbrella/PAYE), or self-employed — our free calculator shows your exact take-home for 2026/27, including a full tax breakdown.
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