Umbrella vs. Limited Company in the UK

Confused about whether to go with an umbrella company or set up your own limited company in the UK? You’re not alone—and the decision could significantly impact your take-home pay, tax liability, and freedom to grow your contracting career.

Whether you’re just starting out as a freelancer or switching from PAYE employment, choosing the right structure is a big deal. It affects how much tax you pay, how much admin you do, and how much control you have over your finances.

Quick answer: If you want simplicity and speed, umbrella might suit you. But if you’re aiming for maximum earnings and tax efficiency, running a limited company could be the smarter move—especially in the long term.

In this guide, we’ll break down the key differences between umbrella and limited companies in the UK, so you can make an informed decision based on real numbers, real scenarios, and real-world pros and cons.

Let’s start by understanding how each model works.

What’s the Difference Between an Umbrella and Limited Company?

The main difference between an umbrella and a limited company is how you’re paid and how much control you have over your income and tax affairs. An umbrella company employs you, while a limited company is one you create and run yourself.

Here’s a quick side-by-side comparison to help you visualise the key differences:

What is an Umbrella Company?

An umbrella company acts as an intermediary between you and your recruitment agency or end client. You technically become an employee of the umbrella, which processes your invoices, pays you through PAYE, and deducts tax, National Insurance, and their own service fee.

You might choose an umbrella company if:

• You want a hassle-free setup
• You’re contracting short-term
• You’re caught by IR35 rules
• Your agency requires it

What is a Limited Company?

A limited company is a separate legal entity that you set up with Companies House. As the director and shareholder, you have full control over how you pay yourself—typically through a mix of salary and dividends, which can reduce your tax bill.

You might choose a limited company if:

• You’re contracting long-term
• Your annual income is above £50,000
• You want to maximise tax efficiency
• You prefer full control and flexibility

In Simple Terms:

Umbrella = Employment with minimal admin
Limited = Self-run business with more control and higher earning potential

Which Option Offers Better Take-Home Pay?

A limited company typically offers higher take-home pay than an umbrella company—especially if you’re earning over £50,000 per year and are outside IR35. This is mainly due to tax efficiency through dividends and business expense deductions.

Quick answer: You could take home 20–30% more with a limited company compared to umbrella, depending on your income and tax position.

How Much Do You Really Take Home?

Let’s compare realistic annual earnings under each structure.

Example 1: £50,000 Gross Contract Income

⚠️ These are rough estimates. Actual results depend on expenses, your IR35 status, and your accountant’s strategy.

Why Does a Limited Company Pay More?

A limited company gives you far more control over how you’re paid, which opens the door to greater tax efficiency. Instead of receiving all your income as salary, you can take a small salary and the rest as dividends — which are taxed at lower rates and don’t attract National Insurance contributions. You also have the flexibility to claim allowable business expenses (such as equipment, travel, or software) that reduce your company’s profit and therefore your tax bill. On top of that, limited companies can benefit from VAT schemes, like the Flat Rate Scheme, which can create extra income if managed well. And of course, you won’t be paying umbrella company fees or dealing with double National Insurance charges.

Why Does an Umbrella Company Pay Less?

With an umbrella company, you’re treated as a standard employee under the PAYE system, so you pay income tax and National Insurance just like you would in a regular job. You can’t claim tax-deductible business expenses (thanks to post-2016 reforms), and you end up paying both employee and employer National Insurance contributions out of your contract rate. To top it off, the umbrella company takes a margin fee — usually around £80 to £120 per month — which further eats into your earnings. The simplicity is nice, but it comes at a cost.

Limited companies usually offer 20–30% higher take-home pay than umbrella companies, especially if your contracts are outside IR35 and your income exceeds £50,000.

Pros and Cons of Each Model

Choosing between an umbrella company and a limited company isn’t just about money — it’s about control, effort, and long-term goals. Here’s what you really need to weigh up before making your decision.

Pros of Using an Umbrella Company

If you want a no-fuss way to start contracting, an umbrella company can be the perfect entry point. The biggest benefit is simplicity — you don’t need to worry about bookkeeping, tax returns, or setting up a business. You become an employee of the umbrella, and they handle all invoicing, tax deductions, and compliance. This setup works especially well if you’re on a short-term contract, inside IR35, or earning below the threshold where a limited company makes financial sense.

You also benefit from some statutory protections like sick pay, holiday pay, and workplace pension contributions. For many first-time contractors, it’s a great low-risk starting point.

Cons of Using an Umbrella Company

That simplicity comes at a cost. Because you’re taxed as an employee, your take-home pay is lower, and you can’t claim expenses to reduce your taxable income. You also have little control over how your money is managed. Many contractors are surprised to learn they’re paying both employee and employer National Insurance contributions — a double hit to their earnings. Add in the monthly umbrella fees, and over the course of a year, you could lose thousands compared to running your own limited company.

Pros of Setting Up a Limited Company

With a limited company, the main advantage is clear: you get to keep more of your money. By combining a small salary with dividends, you can legally reduce your tax bill. Plus, you can deduct legitimate business expenses — from travel to software to equipment — giving you even more control over your income.

Beyond the financials, you also gain full autonomy. You decide how to manage your business, how to brand it, and how to reinvest profits. You can also grow the business, hire staff, or bring in other shareholders. It’s ideal for professionals with long-term contracting plans, especially those earning above £50,000 a year.

Cons of Running a Limited Company

Of course, running a limited company does require more effort. You’ll need to register with Companies House, manage your own accounting (or hire someone to do it), submit annual returns, and stay compliant with tax deadlines. If you don’t enjoy admin or don’t want to hire an accountant, this can feel overwhelming.

Another challenge is IR35 legislation. If your contract falls inside IR35, the tax benefits of a limited company diminish. You’ll still be responsible for more admin, with little to no tax gain — which is why many inside-IR35 contractors stick with umbrella companies.

In a Nutshell:

Umbrella is best if you want to get started quickly, with minimal admin and predictable income.
Limited company is best if you want to maximize your earnings, have long-term plans, and don’t mind a bit of paperwork (or hiring an accountant).

Is a Limited Company Right for You?

A limited company is usually the right choice if you’re contracting long-term, earning more than £50,000 a year, and want more control over your finances.

This structure offers greater flexibility, tax efficiency, and scalability — but it also comes with responsibilities. So, before jumping in, it’s essential to understand when it makes sense to go limited.

When Does Setting Up a Limited Company Make Sense?

Setting up a limited company is most beneficial when:

• You’re working on medium to long-term contracts
• Your annual income is above £50,000–£60,000
• You operate outside IR35 or can manage IR35 compliance
• You want to claim business-related expenses
• You’re open to using or hiring an accountant
• You plan to build your brand, grow, or invest over time

“Should I set up a limited company if I just got a 12-month contract at £450 per day?”

Yes — at that rate, going limited could significantly boost your take-home pay compared to an umbrella model.

Who Typically Benefits Most From a Limited Company?

Professionals in the following fields often benefit from running a limited company:

• IT contractors and developers
• Engineers and construction consultants
• Finance and accounting specialists
• Designers, marketers, and creatives
• Interim managers and consultants
• Medical professionals working independently

These roles often command high day rates, allow flexible working, and involve contracts that fall outside IR35 — making the limited company route the more tax-efficient and scalable option.

When a Limited Company Might Not Be Ideal

There are situations where going limited may not be the best route. For example, if your contracts are short-term, inside IR35, or your income is below £40,000, the tax benefits might not outweigh the extra effort and costs. It’s also less suitable if you simply want to focus on work and avoid administrative responsibilities.

“Is it worth setting up a limited company if I’m only contracting for 3 months?”
Probably not — in that case, an umbrella company may be more cost-effective and hassle-free.

A limited company is ideal if you’re earning more, contracting long-term, and want to keep more of your income through smart tax planning. But it requires admin, discipline, or a good accountant.

Is an Umbrella Company Better for Short-Term or IR35-Contractors?

Yes — an umbrella company is usually the better choice if you’re working short-term contracts, caught by IR35, or want to avoid the admin of running your own company.

It’s the simplest route into contracting, and for many workers, it’s the most compliant and low-maintenance option.

Why Umbrella Companies Work Well for Short-Term Contracts

If your contract is for a few weeks or months, setting up a limited company often isn’t worth the effort. An umbrella company allows you to start working immediately without dealing with Companies House, VAT registration, or business banking.

It’s also ideal for professionals who:

• Are testing the waters of self-employment
• Work seasonally or ad-hoc
• Don’t want the burden of managing finances
• Need to switch between roles or clients quickly

“What’s the best company setup if I’m freelancing for 8 weeks only?”
An umbrella company — it’s faster, easier, and more practical for short-term engagements.

IR35 and Why Umbrella Is the Safer Route

Since the IR35 reform in 2021, many contractors have been classified as “inside IR35”, meaning they must be taxed as employees. If this applies to you, operating through a limited company offers no tax advantage — but you’ll still have the admin burden.

Umbrella companies, however, automatically treat your income as PAYE — making them IR35-compliant by default. This keeps you on the right side of HMRC, especially when working via an agency or in public sector roles.

Who Should Consider Umbrella?

Umbrella companies are especially useful if you:

• Are inside IR35
• Are earning below £40,000–£50,000 per year
• Prefer to avoid admin and tax filings
• Are working with agencies that require umbrella engagement
• Want employee benefits like holiday pay and pensions

Key Takeaway 

Use an umbrella company if you’re on a short-term or inside-IR35 contract. It’s simpler, faster, and keeps your tax compliance hassle-free — but expect a lower take-home pay.

Umbrella vs. Limited Company: Which Is Easier to Set Up?

An umbrella company is far easier and faster to set up than a limited company. If you’re looking to get started quickly with minimal admin, umbrella is the clear winner.

“How long does it take to start working with an umbrella company?”

Often same day — you just fill out a few forms and provide ID.

Setting Up with an Umbrella Company

Joining an umbrella company is straightforward. You usually:

1. Choose a provider (your agency may recommend one)
2. Sign an employment contract
3. Submit ID and right-to-work documents
4. Provide bank details and National Insurance number

Once you’re on boarded, they’ll invoice the agency/client, deduct tax and their margin, and pay you via PAYE.

No need to register with Companies House, open a business account, or file annual returns.

It’s ideal if you need to start work tomorrow or want to avoid the hassle of setting up your own business.

Setting Up a Limited Company

Starting a limited company takes more steps, but it’s manageable — especially with a good accountant.

Here’s what the setup usually involves:

1. Register your company with Companies House
2. Choose a business name and SIC code
3. Open a business bank account
4. Register for Corporation Tax and possibly VAT
5. Set up payroll (if taking salary)
6. Appoint an accountant or bookkeeping system

⚠️ On boarding can take 3–10 working days, depending on how prepared you are.

It’s not overly complex, but it’s not instant — and you’ll be responsible for staying compliant with tax filings, annual accounts, and recordkeeping.

Key Takeaway

Umbrella companies are faster and easier to join — often within 24 hours.
Limited companies offer more control but require setup time, paperwork, and ongoing compliance.

What Are the Tax Differences Between Umbrella and Limited Company?

The tax treatment between umbrella companies and limited companies is fundamentally different, affecting how much tax you pay and how you manage your finances.

Umbrella Company Tax Explained

When you work through an umbrella company, your income is treated like a regular employee’s salary. The umbrella company processes your payments under PAYE (Pay As You Earn), deducting income tax and National Insurance contributions before paying you.

You don’t get to claim business expenses because, since 2016, HMRC limits what umbrella workers can deduct. Also, you pay both the employee and employer National Insurance costs indirectly, which reduces your overall take-home pay.

Additionally, the umbrella company charges a fee for their service, usually taken monthly, further lowering your net earnings.

Limited Company Tax Explained

A limited company pays corporation tax on its profits, currently set at 25% for most businesses in the UK. As the director, you typically pay yourself a small salary (subject to income tax and National Insurance) and take the rest of your income as dividends.

Dividends are taxed differently and generally at lower rates than salary, which can reduce your overall tax bill significantly.

Importantly, as a limited company director, you can claim legitimate business expenses to reduce taxable profits — everything from travel costs to professional subscriptions.

Key Tax Differences Summarized

Umbrella:
You pay income tax and National Insurance via PAYE, with limited ability to claim expenses. The umbrella fee applies.

Limited Company:
You pay corporation tax on profits, take a salary plus dividends, and can claim business expenses to reduce tax.

 Umbrella workers pay standard employee taxes through PAYE, with fewer deductions. Limited companies benefit from corporation tax, dividends, and expense claims—making them more tax-efficient for many contractors.

FAQs About Umbrella vs. Limited Company in the UK

What’s the best option for a contractor earning £50K–£100K?

For contractors earning between £50,000 and £100,000, a limited company usually offers higher take-home pay due to tax efficiencies with dividends and expenses. However, if you’re inside IR35 or prefer simplicity, an umbrella company may still be appropriate.

Do I need an accountant for a limited company?

While not legally required, hiring an accountant is highly recommended for limited companies. They help with tax planning, filing annual returns, and ensuring compliance, saving you time and potentially money.

Is an umbrella company better if I only contract for 6 months?

If you’re contracting short-term (around 6 months or less), an umbrella company might be easier and more cost-effective. It avoids the setup and admin burden of a limited company.

Does IR35 apply to both umbrella and limited companies?

Yes, IR35 rules affect limited companies by determining whether contracts are inside or outside IR35. Umbrella companies operate under PAYE, so IR35 is effectively built in, simplifying compliance for contractors.

Can I switch from an umbrella company to a limited company later?

Absolutely! Many contractors start with an umbrella company for simplicity and switch to a limited company once they secure longer contracts or want greater control and tax savings.

Can I claim expenses if I work through an umbrella company?

Since 2016, the ability to claim business expenses through umbrella companies has been significantly restricted. Most umbrella workers cannot claim expenses like travel or equipment.

What are the ongoing admin requirements for a limited company?

Limited companies must file annual accounts, submit a Corporation Tax return, maintain statutory records, and comply with payroll and VAT regulations (if applicable). This usually requires either accounting software or professional help.

FAQ Summary 

Umbrella companies are simple, with PAYE tax and limited expenses. Limited companies offer tax advantages but need admin and possible accountant support. IR35 applies differently depending on your structure, and switching between models is possible.

Final Verdict: Which Is Right for You?

Choosing between an umbrella company and a limited company depends on your contract length, income, IR35 status, and how much control you want over your business.

When to Pick an Umbrella Company

If you want speed, simplicity, and minimal paperwork, especially when working short-term or inside IR35, an umbrella company is the safest and easiest option. It gives you employee benefits like holiday pay but comes with less take-home pay.

When to Pick a Limited Company

If you want to maximize your earnings, have long-term contracts, and are comfortable handling or outsourcing business admin, a limited company usually makes the most financial sense. You can take advantage of tax efficiencies and build your own brand.

Need Help Deciding?

If you’re still unsure, consider consulting with an accountant who specializes in contractor finances. They can review your situation, help with IR35 assessments, and advise on the best structure for your goals.

Ready to Talk? Contact Eternity Accountants Today

Make the right choice for your contracting career. Book a free consultation with Eternity Accountants to get tailored advice on umbrella vs. limited companies and maximize your take-home pay.

Make the Right Choice for Your Contracting Future

Choosing between an umbrella company and a limited company isn’t just about taxes—it’s about your lifestyle, career goals, and peace of mind. If you want simplicity and minimal fuss, an umbrella company lets you get started quickly with fewer responsibilities. But if you’re aiming to maximize your income, build your own business, and enjoy more control, a limited company is usually the smarter, long-term option.

Remember, the right choice depends on your contract length, IR35 status, and earnings level. Take the time to evaluate what suits you best—and don’t hesitate to seek expert advice.

Ready to Take the Next Step?

At Eternity Accountants, we specialize in helping UK contractors like you navigate the umbrella vs. limited company decision.

­Book your free consultation today and get personalized guidance that puts more money in your pocket and less stress on your plate.