Contractor tax structures compared

PAYE versus limited company versus umbrella company: which contractor route gives highest take-home, lowest admin and best protection under IR35.

Three contractor routes

PAYE employment

You're an employee of the end client. They pay you via PAYE. You receive net salary after Income Tax and National Insurance. You get employee rights (holiday pay, sick pay, pension) but cannot claim business expenses or optimize tax via dividends.

Limited company (outside IR35)

You incorporate a company. The company invoices clients. You pay yourself a small salary (£12,570 Personal Allowance) to avoid tax/NI, then take remaining profit as dividends. Dividends are taxed at 8.75%/33.75%/39.35% with no National Insurance.² The company pays Corporation Tax at 19% (under £50k profits) or 25% (over £250k).³ You can claim business expenses (travel, equipment, accountant fees) to reduce Corporation Tax.

Umbrella company

An umbrella company employs you. They invoice the client, take a margin (£25-£35/week), pay employer's NI (13.8%), then pay you via PAYE. You're an employee of the umbrella. Simpler than limited company but lower take-home because employer's NI comes out of your gross rate.⁴

Take-home comparison

Example: £500/day, 220 days/year = £110,000 gross.

• PAYE: £68,000 net (after Income Tax and employee NI)
• Limited company (outside IR35): £78,000 net (after £3k expenses, Corporation Tax, dividend tax)
• Umbrella: £65,000 net (after margin, employer's NI, Income Tax, employee NI)

Limited company wins outside IR35. Inside IR35, the advantage disappears because you pay deemed employment income tax (broadly the same as PAYE).

IR35 considerations

IR35 (off-payroll working rules) determines whether HMRC treats you as employed or self-employed for tax purposes. If you work for a medium/large private-sector client or any public-sector client, the client decides your status.⁵

Outside IR35: you can use dividends and claim expenses. Limited company gives highest take-home.

Inside IR35: you pay employment taxes (Income Tax + NI) even via a limited company. Umbrella may be simpler because it handles PAYE automatically.

Admin and costs

Limited company: annual accountant fees £800-£1,500, Companies House filing, Corporation Tax return, VAT returns (if registered), director's duties. Significant admin.

Umbrella: no admin beyond timesheets. Umbrella handles payroll, tax, National Insurance. Margin typically £1,300-£1,800/year.

PAYE: zero admin. Employer handles everything.

Which route to choose

Choose limited company if:

• You're outside IR35
• You have multiple clients
• You're comfortable with admin or can afford an accountant
• You want to maximize take-home

Choose umbrella if:

• You're inside IR35
• You want minimal admin
• You contract short-term or intermittently

Choose PAYE if:

• You want employee benefits (holiday pay, pension, sick pay)
• You value employment rights over take-home
• The client insists on direct employment

Limited company take-home advantage

~15% higher (outside IR35)

Umbrella company margin

£25-£35/week

Accountant cost (limited company)

£800-£1,500/year