If you are starting out as a contractor — or reassessing your current setup — one of the first decisions you will face is whether to work through an umbrella company or your own limited company. Both options have their merits, and the right choice depends on your situation.
How umbrella companies work
An umbrella company acts as your employer. You submit timesheets, the umbrella invoices the agency or end client, deducts PAYE tax and NI, and pays you a salary. It is simple — almost no administrative obligations — and works well for contractors inside IR35 or those who want to keep things straightforward.
How limited companies work
Operating through your own limited company gives you more control and, for many contractors, better tax efficiency. You pay yourself a salary and dividends, claim business expenses, and pay corporation tax on profits. It requires more administration but typically results in higher take-home pay for contractors outside IR35.
The key differences
- Tax efficiency: limited companies are generally more tax-efficient for contractors outside IR35
- Admin: umbrella companies involve almost no admin; limited companies require accounts and tax returns
- Employment rights: umbrella workers have statutory rights (holiday pay, auto-enrolment); limited company directors generally do not
- IR35: if contracts are inside IR35, the tax advantage of a limited company largely disappears
Which is right for you?
If you are new to contracting or most of your work is inside IR35, an umbrella company offers simplicity without significant tax cost. If you are confident your contracts are outside IR35 and expect to earn above approximately £30,000–£35,000 per year, a limited company will usually be more tax-efficient.
Switching from umbrella to limited company
If you started with an umbrella and want to move to a limited company, the process is relatively straightforward. You incorporate, register for corporation tax and PAYE, and ensure your contracts are set up correctly. Your accountant can guide you through the transition.
Talk to us about your situation
Our chartered accountants work with small businesses, landlords and contractors across Surrey, Kent and Sussex. Get in touch for a free initial consultation.
