Outside IR35, a limited company typically puts extra money in your pocket each year; inside IR35, an umbrella company is usually the smarter, simpler choice.
Key Takeaways
- If you’re outside IR35 and contracting long-term, a limited company almost always delivers higher take-home pay.
- If you’re inside IR35, an umbrella company is usually the cleaner option: the tax advantages of a limited company largely disappear and the admin burden no longer pays for itself.
- Umbrella companies handle PAYE, National Insurance, holiday pay and statutory rights, but charge a weekly or monthly margin that comes out of your pay.
- Limited company directors typically combine a small salary with dividends.
- Switching between the two structures is straightforward but not instant: expect 1-2 weeks to set up a limited company and a bank account, versus same-day onboarding with most umbrellas.
Table of contents
1. The fast answer: which structure fits which contractor
The answer depends almost entirely on two variables: your IR35 status and how long you plan to contract.
Use the matrix below to find your situation, then read the sections that apply. The rest of this guide explains the mechanics, the numbers and the constraints behind each recommendation.
| Your situation | Short-term (under 12 months) | Long-term (12+ months) |
| Outside IR35 | Umbrella is fine: limited isn’t worth the setup cost yet | Limited company: meaningful tax savings build up quickly |
| Inside IR35 | Umbrella: simplest route, minimal admin | Umbrella in most cases: Ltd offers little tax advantage when inside IR35 |
| Mixed (some inside, some outside) | Umbrella: flexibility outweighs everything else | Limited if outside contracts dominate; umbrella if inside contracts dominate |
| New to contracting | Umbrella: get paid this week, decide later | Umbrella for the first 3–6 months, then re-evaluate |
If your situation lands in the limited-company quadrant, the rest of this guide will show you why and what to expect. If umbrella is the right call, you’ll find the practical detail on fees, employment rights and the agency PSL constraint that drives many contracts down the umbrella route by default.
2. How a limited company actually works for a contractor
A limited company is a separate legal entity that you own and direct.
You invoice your clients through the company, the company pays Corporation Tax on its profits, and you extract money from the company as a director: typically through a combination of salary and dividends.
Setup and filing duties
You incorporate at Companies House, open a business bank account, register for Corporation Tax with HMRC, and register for VAT if your turnover exceeds £90,000 or you choose to register voluntarily.
You’ll file annual accounts and a confirmation statement at Companies House, a Corporation Tax return at HMRC, payroll RTI submissions if you take a salary, and personal Self Assessment each year.
Allowable expenses
You can claim a broader range of business expenses against profit before Corporation Tax:
- equipment
- software
- training
- accountancy fees
- travel to temporary workplaces
- business insurance
- a proportion of home office costs
- pension contributions paid by the company.
For a videographer buying camera gear, an illustrator subscribing to Adobe Creative Cloud, or a producer covering studio bookings, this can shift several thousand pounds a year out of the tax base.
Liability and credibility
As director and shareholder, you’re protected by limited liability: your personal assets aren’t on the line if the company runs into trouble (with normal exceptions for personal guarantees and director misconduct).
Some clients will only engage with limited companies, so being incorporated can widen the contracts you’re eligible for.
3. How an umbrella company actually works
An umbrella company is a third-party business that employs you on a PAYE basis and handles every administrative step between your client and your bank account. You submit timesheets, the umbrella invoices the agency or end client, deducts tax and National Insurance through PAYE, and pays you a net salary.
It’s the simplest route into contracting and the default option whenever IR35 status is uncertain or contracts are short. The trade-off is take-home pay, and there are some employment-rights upsides that don’t usually get the airtime they deserve.
PAYE deductions
Your assignment rate (what the agency pays the umbrella) is not what you take home. The umbrella deducts employer’s National Insurance, the Apprenticeship Levy, its own margin, and then runs your remaining gross pay through PAYE.
After income tax, employee’s NI and any pension contributions, what lands in your account is typically 55–70% of the assignment rate depending on your tax band.
Employment rights
Because you’re a PAYE employee of the umbrella, you receive statutory employment rights:
- holiday pay (typically rolled into your assignment rate)
- statutory sick pay
- maternity and paternity pay
- auto-enrolment into a workplace pension.
Day-to-Day Workflow
Submit your timesheet weekly or monthly, usually to both the umbrella and the end client for approval.
The umbrella invoices the agency or client, waits for payment, then pays you on a set pay date.
You have no invoicing, no bookkeeping, no Corporation Tax calculation and no Companies House filings to worry about.
4. Switching between umbrella company vs limited company
Most contractors switch direction at least once.
New contractors typically start umbrella to test the waters, then move to limited when they’re confident in the work and the rates. Established limited company contractors sometimes switch to umbrella when an inside-IR35 contract is too good to turn down.
Umbrella to Limited
- Confirm your next contract is outside IR35 and that the agency permits limited company contracting
- Incorporate at Companies House
- Open a business bank account
- Register for Corporation Tax with HMRC and for VAT if relevant
- Appoint a specialist accountant before your first invoice goes out
- Give your umbrella appropriate notice (usually one week to one month) and request your P45
Limited to Umbrella
- Sign up with a compliant umbrella: same-week onboarding is standard.
- Decide whether to keep your limited company dormant or close it. Dormant is cheaper if you expect outside-IR35 work to return; closure via Members’ Voluntary Liquidation can be more tax-efficient if you have significant retained profits.
- If keeping the company active, continue filing accounts and confirmation statements with no trading activity.
- If closing, plan around Business Asset Disposal Relief if you qualify for the £1 million lifetime limit at the 14% rate from April 2026.
Either direction is manageable, but the costs of switching back are higher than most contractors expect.
5. A specialist accountant in your corner
Both structures work. Neither is wrong.
The right one is the one that fits your specific contracts, IR35 status and contracting horizon, and the numbers above should let you make that call with confidence.
If you’re a UK creative contractor weighing limited vs umbrella for an upcoming role, or you’re already running a limited company and want a second opinion on the structure, we’re here.
WallsMan Creative specialises in accounting for the creative sector — designers, agencies, freelance directors, illustrators, video production teams and developers.
We’ll model your specific take-home pay across both routes, advise on IR35 status, and help you make the structural call that puts the most money in your pocket without the admin overload.
Get in touch to talk it through.
