Umbrella or limited company: which suits a contractor
For contractors this decision is usually settled by one thing: whether your engagements fall inside or outside the off-payroll working rules. Everything else is secondary.
An umbrella company employs a contractor and pays them through PAYE, deducting income tax and National Insurance at source. A personal limited company is owned by the contractor, who takes a salary and dividends from it. Which is more efficient depends primarily on whether the engagement falls inside or outside the UK off-payroll working rules.
Figures are for the 2026/27 tax year. Last checked against gov.uk on 23 August 2026. The sources are on our tax dates and rates page.
Start with the off-payroll rules, not the tax
The off-payroll working rules decide whether an engagement should be taxed like employment. Where the end client is a public body or a medium or large private company, the client makes that determination and the fee payer operates PAYE if the engagement is inside. Where the end client is a small private company, the responsibility sits with your own company.
If your engagements are consistently inside the rules, most of the tax advantage of a personal company disappears, because the income is taxed like employment anyway. If they are consistently outside, a company gives you control over how and when you take money out.
Setting up a company for work that turns out to be inside the rules gives you the admin of a company without the benefit. Ask the client for the status determination before committing to a structure.
How they compare
| Umbrella company | Your own limited company | |
|---|---|---|
| How you are paid | Employed by the umbrella and paid through PAYE | Salary and dividends from your own company |
| Tax treatment | Income tax and National Insurance at source | Corporation tax on profit, then dividend tax on what you draw |
| Admin | Almost none. The umbrella handles it | Accounts, corporation tax return, confirmation statement, payroll, personal return |
| Cost | A weekly or monthly margin taken by the umbrella | Accountancy fees, from £70 a month with us |
| Control of income timing | None. Paid as you work | You choose when to draw, which can spread income across tax years |
| Best suited to | Short assignments, engagements inside the off-payroll rules, or a first contract | Longer term contracting outside the rules, especially at higher rates |
Things contractors get caught by
- An umbrella quoting a headline rate that has not had employer National Insurance and the apprenticeship levy taken off yet. Ask for an illustration of actual take-home.
- Assuming the VAT Flat Rate Scheme will help. Many contractors fall within the limited cost business rules, which apply a higher flat rate and remove most of the benefit.
- Travel between home and a single long-term client site being treated as an ordinary commute rather than business travel.
- Running a company for a single engagement that is inside the off-payroll rules, which gives you the admin without the advantage.
- Closing a company down without planning, when the tax treatment of retained profits on winding up can be worth getting advice on first.
You can use both
Contractors often run a limited company for engagements outside the rules and go through an umbrella for a short assignment that is inside. That is normal and there is nothing wrong with it. A dormant company can sit quietly between contracts, though it still has filing obligations, so it is not entirely free.
Questions people ask about this
Am I better off with an umbrella or my own limited company?
It usually depends on whether your engagements fall inside or outside the off-payroll working rules. Inside the rules, the income is taxed much like employment either way, so an umbrella is simpler for the same outcome. Outside the rules, a limited company normally leaves you better off because you control the mix of salary and dividends, and dividends carry no National Insurance.
What are the off-payroll working rules?
They decide whether an engagement should be taxed like employment. For public sector clients and medium or large private sector clients, the client makes the determination and the fee payer operates PAYE where an engagement is inside. Where the client is a small private company, the responsibility sits with your own company instead.
How much does an umbrella company cost?
Umbrellas charge a margin, usually weekly or monthly. The more important number is what actually reaches you, because employer National Insurance and the apprenticeship levy are typically deducted from the assignment rate before your gross pay is worked out. Ask for a full illustration rather than comparing headline rates.
Can I switch between an umbrella and a limited company?
Yes, and many contractors use both, running a company for engagements outside the off-payroll rules and going through an umbrella for short or inside-rules assignments. A company can sit dormant between contracts, though it still has filing obligations.
Should I join the VAT Flat Rate Scheme as a contractor?
Work it out before assuming it helps. Many contractors meet the limited cost business definition, which applies a higher flat rate and removes most of the benefit. It depends on how much VAT you actually incur on purchases, so it is worth calculating both positions on your own figures.
This guide is general information about how the rules work, not advice for your circumstances, and it does not cover every rule or exception. The right answer depends on your own figures. Speak to us, or another qualified adviser, before deciding.
Want this worked out on your actual numbers?
We will run the comparison on your figures and tell you plainly which way it falls, including when the answer is to leave things as they are. The first consultation is free.
Sole trader vs limited company →
How the choice between sole trader and limited company actually works: tax, National Insurance, liability, filing and admin, with 2026/27 figures.
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