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UK contractors are paid either through an umbrella company or through their own limited company, and the IR35 status of the contract usually decides which. Here is how each one works, what it costs and when to use it.
| Umbrella company | Limited company | |
|---|---|---|
| Who you work for | You are an employee of the umbrella company | You are a director and shareholder of your own company |
| Fits | Inside IR35 contracts, short contracts, contractors who want no admin | Outside IR35 contracts, contractors in business for the long term |
| Tax | Income tax and National Insurance deducted through PAYE on every payslip | Corporation tax on profits, then personal tax on the salary and dividends you take |
| What comes out of the rate | Employer National Insurance, Apprenticeship Levy, the umbrella margin, often the employer pension | Your running costs: accountant, insurance, bank, software |
| Employment rights | Statutory rights as the umbrella's employee, such as holiday pay and statutory sick pay | None from the client, you run a business |
| Admin | Timesheets only | Companies House filings, accounts, corporation tax return, payroll, VAT once registered |
The umbrella company employs you for the length of your contracts. It invoices the recruitment agency at the agreed rate, takes out the employer costs and its margin, then pays you through PAYE like any employer, with income tax and National Insurance deducted. Holiday pay is either accrued or paid with each payslip, and you are auto enrolled in a workplace pension. It is the usual route for inside IR35 contracts because it needs no company of your own.
With your own limited company you are a director, the company signs the contract and invoices the agency or client. It pays corporation tax on its profits, and you usually pay yourself through a mix of salary and dividends, each taxed differently. You need an accountant, business insurance such as professional indemnity, and you must keep up with Companies House and HMRC filings. It makes the most sense on outside IR35 contracts and when you contract for the long term.
Most umbrella companies are legitimate employers, but some schemes promise unusually high take home pay by paying part of your money as a loan, a grant or an investment, or by passing you through a chain of small companies. HMRC warns contractors about these arrangements, and the person who received the money remains liable for the unpaid tax. Check that your payslip shows tax and National Insurance on the full amount you receive. Accreditation by an industry body such as FCSA or Professional Passport is a useful signal, but not a guarantee. Since April 2026 the recruitment agency, or the client when there is no agency, can also be held liable for PAYE that an umbrella fails to pay, so agencies are checking their umbrella suppliers more closely.
This guide gives general information based on public sources, not tax, legal or financial advice. Rules and rates change: check GOV.UK and talk to an accountant about your own situation.
Compare inside and outside IR35 ratesWhat does an umbrella company take from my day rate?
The rate paid to the umbrella, often called the assignment or umbrella rate, has to cover the employer National Insurance, the Apprenticeship Levy, the umbrella's own margin and often the employer pension contribution. What is left is your gross pay, from which income tax and employee National Insurance are deducted. Ask for a full illustration before you sign.
What is the difference between an umbrella rate and a PAYE rate?
An umbrella rate still includes the employer costs, which the umbrella takes out. A PAYE rate from an agency payroll usually already has them taken out. That is why an umbrella rate is often quoted higher than a PAYE rate for the same role.
Can I use my limited company for an inside IR35 contract?
It is possible, but the fee payer deducts tax and National Insurance before paying your company, so most of the tax advantages disappear and many agencies require an umbrella or their own payroll instead.
When does my limited company have to register for VAT?
Once its VAT taxable turnover goes over £90,000 in a rolling 12 month period, or is expected to. It can also register voluntarily below that threshold.
How do I spot a non compliant umbrella scheme?
Be wary of an umbrella that promises to let you keep much more than others, pays part of your money as a loan, grant, bonus or investment, or shows less pay on your payslip than you were paid. HMRC publishes warnings about these schemes, and you remain liable for the tax they avoid.
