How the two routes actually differ
Both routes start with the same number: the rate your agency or client has agreed to pay. What happens to that money between the client's bank account and yours is where the two paths separate.
Under an umbrella company, you become an employee of the umbrella. The agency pays the umbrella your assignment rate, and the umbrella pays you a salary out of it — after taking its margin, and after paying the employment costs that would normally sit with an employer. That is the part most people are surprised by: employer's National Insurance is not an extra on top of your rate, it comes out of it.
Under a limited company, you are a director and shareholder. Your company invoices the client, pays Corporation Tax on its profit, and you extract money as a small salary plus dividends. Dividends carry no National Insurance at all, which is where most of the advantage comes from.
What comes out of an umbrella payment
Working down from the assignment rate:
- The umbrella's margin — a flat fee, typically £15 to £30 a week. It does not scale with your rate, so it matters far more at £200 a day than at £700.
- Employer's National Insurance — 15% on earnings above £5,000 a year. This is the single biggest deduction and the one that makes umbrella payslips look worse than people expect.
- The Apprenticeship Levy — 0.5%. Umbrella companies have pay bills well over the £3 million threshold, so they pass it on.
- Your own income tax and employee National Insurance — the normal PAYE deductions on whatever is left, at 20/40/45% and 8%/2%.
Holiday pay is not a deduction. It is either rolled up into each payment or held back and paid when you take leave, but either way it is your money and it is already inside the figures above.
What comes out of a limited company
The order is different, and that difference is worth money:
- Running costs — accountancy fees, insurance, software. These come off the profit before tax, so they cost you less than the headline figure.
- A director's salary — usually set at either £12,570 or £5,000. Salary is a deductible company expense, so it reduces Corporation Tax.
- Corporation Tax — 19% on profits up to £50,000, 25% above £250,000, with marginal relief in between producing an effective rate of 26.5% on the middle band.
- Dividend tax — the first £500 is tax-free, then 10.75%, 35.75% or 39.35% depending on your band. These rates rose by two percentage points in April 2026, which narrowed the gap between the two routes.
Why the salary choice matters
A single-director company with no other employees cannot claim the £10,500 Employment Allowance. So a £12,570 salary triggers employer NI of 15% on the £7,570 above the threshold — around £1,136 a year. In return, both the salary and that NI are deductible against Corporation Tax. For most contractors that trade still comes out ahead, but the calculator above lets you check it against a £5,000 salary, which avoids employer NI entirely.
What changed in April 2026
Two things worth knowing. First, dividend tax rates went up two percentage points for basic and higher rate taxpayers, so the limited company advantage is smaller than it was a year ago. Second, responsibility for operating PAYE in umbrella supply chains moved up the chain: the recruitment agency, or the end client where there is no agency, is now jointly liable for unpaid PAYE and National Insurance. The umbrella still runs the payroll, but agencies now carry the risk if it goes wrong.
For contractors, the practical effect of the second change is that agencies have tightened their approved umbrella lists. If you were using a smaller provider, check it is still accepted before your next assignment starts.
The costs the calculator cannot show you
Money is not the whole comparison. A limited company means annual accounts, a Corporation Tax return, a Confirmation Statement, a personal Self Assessment, VAT returns if you register, and a few hours a month of admin. An umbrella means none of that — you get a payslip and you are done.
Umbrella also gives you statutory employment rights: sick pay, maternity and paternity pay, and continuity that some mortgage lenders prefer. A limited company gives you flexibility that an umbrella cannot: you can leave profit in the company across tax years, split shares with a spouse who has unused allowances, or pay a large employer pension contribution straight from pre-tax profit — which is often worth more than the dividend saving on its own.
If you are contracting for a few months between permanent roles, umbrella is almost always the right answer regardless of what the numbers say. If you expect to contract for years, the company route usually wins once you factor in the pension.
Frequently asked
Is umbrella ever better than a limited company?
At low day rates, yes. The umbrella's flat weekly margin is a small proportion of a high rate but a meaningful one at £150 a day, while the fixed costs of running a company — around £1,200 to £1,800 a year for an accountant and insurance — do not shrink either. Below roughly £200 a day the two routes converge and the admin saving tips it.
Can I use both?
Yes. Many contractors keep a limited company running for outside-IR35 work and go through an umbrella for inside-IR35 assignments. Your company can stay dormant between contracts.
Why does my umbrella illustration differ from this?
Usually because of pension auto-enrolment, a different margin, holiday pay being held back rather than rolled up, or an emergency tax code in your first month. Ask for a breakdown that shows employer NI as a separate line — a compliant umbrella will provide one without hesitating.