The decision to work through an umbrella or a limited company is the first step for new contractors to take. It’s also the most important one to make as your chosen setup has implications for your income, admin, and tax planning. In this guide, we’ll highlight some of the key features of umbrellas and Ltd companies, and help you decide which structure is right for you.
Umbrella or Ltd: what’s the difference?
Umbrella
An umbrella company is essentially your employer and takes care of all aspects of taxation, payroll, and regulatory compliance on your behalf. You’ll provide timesheets for your contracted work, and in return the umbrella company will pay you a net salary with PAYE tax and National Insurance (NI) deducted.
Umbrella companies have some advantages and disadvantages:
Pros
- No admin work for you to do.
- No HMRC accounts or other filings to make.
- Suitable for short-term contract work.
- Most viable option if you’re required to work inside IR35
Cons
- Higher taxes, PAYE rates are 20–45% (30–40% average tax on income)
- Less control over deductions
- Fees of £20 to £50 per week
Ideal contractor profiles
Contractors with little or no experience running a business, earning less than £200 to £300 per day, or not wanting to deal with admin.
Quick example
As a contractor earning £400 per day, you could take home £60,000 per annum on an umbrella structure vs £75,000 per annum as a Ltd company contractor working outside IR35.
Ltd company / Limited company
If you operate a limited company, it is your own limited business entity, giving you more control over your income, expenses, and tax affairs. However, there’s more administration work involved and you can’t avoid accounting and payroll responsibilities.
Pros
- Flexibility of pay
- Lower tax rate (19–25% on corporation tax, 8.75% on dividends)
- Claim expenses (if genuine)
- Make pension contributions tax-free up to £60,000 per annum
Cons
- More admin and HMRC filings (company accounts, VAT if >£90K turnover, etc.)
- Upfront costs for company set up (Included as part of our solo package cost)
Ideal contractor profiles
Contractors who are well-versed in running a limited company, earning £400+ per day, and working outside IR35.
Quick example
As a contractor earning £400 per day, you could take home £60,000 per annum on an umbrella structure vs £75,000 per annum as a Ltd company contractor working outside IR35.
IR35 and the choice between umbrella and Ltd
If you work under an IR35 compliant contract, the main benefits of using a Ltd company (tax savings and flexibility) are substantially reduced, making umbrellas more competitive by comparison.
On the other hand, if you’re working outside IR35, a Ltd company remains by far the best option for high-earning contractors in the UK.
Additional considerations: hidden costs
Umbrella companies
Hidden fees, or more worryingly, “employer’s NI” contributions being deducted from your pay before it’s issued.
Ltd companies
Accounting fees (£109 plus VAT per month with our Solo package), insurances (£30 per month).
Should I use an umbrella company or my own Ltd?
While there’s an element of personal choice in this decision, it comes down to comparing your earnings and taxes. If you are a high earner, working outside IR35, you will be better off with your own limited company setup.
The main consideration, which many new contractors forget to consider, is the tax efficiency of the structures.
Setting up your own Ltd company means you can plan and save more of your income as a contractor in the UK. It can be a little more work upfront, but once set up, there’s a vast difference in take-home pay vs working on an umbrella structure.
Why Bright Ideas?
No matter which option you choose, we can help you decide, set up your company, and file all the relevant accounts and taxes using our FreeAgent platform. Our in-house accountants offer fast, personalised support with a same-day response to queries.
Get in touch now or book a free consultation call to discuss which structure is best for you, and how to get started as a contractor with minimal admin hassle.
