UK contractors have two main structural choices when working through an intermediary: their own personal service company (PSC) or an umbrella company. The tax treatment is fundamentally different, the take-home pay differs materially, and the administrative burden varies significantly. This guide gives a clear-eyed comparison for 2026/27.
Written by James Whitfield · Updated August 2026 · Checked against 2026/27 HMRC rates · Editorial standards · Methodology
An umbrella company employs you and taxes everything through PAYE - no dividends, minimal admin, but employer NI and the umbrella's margin come out of your assignment rate first. Your own limited company lets you take a low salary plus dividends and keep more, but only on contracts that sit outside IR35.
Inside IR35 the two end up close, because the company income is taxed like employment - so for genuinely inside-IR35 work the umbrella's simplicity usually wins.
An umbrella company employs the contractor and invoices the end client or agency on their behalf. The umbrella company receives the contract income, deducts its margin (typically £15–£35 per week), then pays the contractor as an employee, with PAYE income tax, employee National Insurance and employer NI all applied before the contractor receives their pay.
The contractor is a straightforward employee of the umbrella company for tax purposes. There is no limited company, no corporation tax, no dividend extraction, no director salary planning. Income tax is applied at normal PAYE rates (20% basic, 40% higher), employee NI at 8% between £12,570 and £50,270 and 2% above, and employer NI at 15% on earnings above £5,000 is deducted from the gross contract fee before the contractor is paid.
The headline simplicity of umbrella employment is real: no company formation, no annual accounts, no corporation tax return, no director payroll administration. The trade-off is the tax cost, all income is employment income, taxed at PAYE rates with no ability to use the dividend tax rates that make limited company contracting tax-efficient.
With a personal service company (limited company), the contractor is both director and shareholder. The company invoices the client or agency, receives contract income, pays corporation tax (19–25%), and the contractor extracts income as a combination of salary and dividends. The dividend route avoids National Insurance and applies lower dividend tax rates, 10.75% basic rate versus 20% income tax.
The tax saving from PSC contracting compared to umbrella comes primarily from NI: dividends carry no NI, while umbrella employment income is subject to both employee NI (8%) and employer NI (15% taken from the contract fee). At a day rate of £350 for 220 days per year (£77,000 annual contract income), the NI saving from PSC contracting versus umbrella can be £6,000–£10,000 per year.
However, this advantage is contingent on the contract being outside IR35. If the contract is inside IR35, the PSC income is treated as deemed employment income and the NI and income tax advantages disappear entirely. The IR35 determination has become the central question for most limited company contractors.
Annual contract income: £77,000 (£350/day × 220 days). Under umbrella (assuming no significant deductible expenses): employer NI at 15% on approximately £68,000 (above £5,000 threshold) = approximately £9,450 taken from contract income before pay. Net to employee: approximately £67,550. Income tax: approximately £21,930. Employee NI: approximately £4,381. Take-home: approximately £41,239. Plus umbrella fee of approximately £1,200/year deducted.
Under limited company (outside IR35): company receives £77,000. Director takes £12,570 salary. Employer NI on salary: £1,139. Taxable profit: £77,000 − £12,570 − £1,139 = £63,291. Corporation tax at marginal relief (approximately 21%): approximately £13,291. Post-tax dividends available: approximately £49,999. Director takes £37,200 in basic-rate dividends. Dividend tax: approximately £3,255. Total personal income: £49,770. Personal take-home: approximately £46,515. Company retains approximately £12,799.
PSC outside IR35 advantage over umbrella: approximately £5,276 more in personal take-home, plus £12,799 retained in the company. This is the financial incentive for maintaining PSC contracting when outside IR35. The corresponding risk is that if IR35 is found to apply retrospectively, back-tax, NI, interest and penalties can easily exceed the cumulative savings.
Umbrella company employment makes sense in several scenarios. First, when inside IR35: if a contract is determined to be inside IR35, using the PSC structure merely adds compliance complexity without any tax benefit. Many contractors in this position choose umbrella for simplicity.
Second, for short-term or intermittent contracts: the fixed cost of maintaining a limited company (accountancy, Companies House filings, payroll administration, VAT if registered) typically runs £1,500–£3,000 per year. For a contractor working only a few months per year, the tax saving from a PSC may not justify these costs.
Third, for contractors who cannot demonstrate an outside-IR35 position: if the engagement genuinely looks like employment, single client, long duration, working under client control, an outside-IR35 determination may be unsustainable. Umbrella employment removes the compliance risk and the exposure to retrospective HMRC enquiry. For some contractors, the tax saving is not worth the professional and financial risk of an aggressive outside-IR35 claim.
Typically £4,000–£8,000 per year more for a contractor billing £300–£400 per day, if the contract is outside IR35. The saving comes primarily from avoiding employer NI on contract income and using dividend tax rates instead of income tax on extraction.
Not necessarily, a PSC can operate inside IR35 using the deemed employment calculation. But umbrella employment achieves a similar end state more simply, without the overhead of maintaining a limited company. Many contractors with inside-IR35 contracts choose umbrella for this reason.
Reputable umbrella companies operate PAYE correctly and are fully tax-compliant. The employer NI and income tax deductions are made at source before the contractor is paid. Avoid non-compliant umbrella arrangements that promise to pay more than comparable alternatives, these often involve disguised remuneration schemes that create significant personal tax liabilities.
Typically £1,200–£2,000 per year for a basic PSC with one director, covering annual accounts, corporation tax return and director self-assessment. Some accountants charge more for VAT registration or complex extraction strategies. This cost should be factored into the limited company vs umbrella comparison.
The rates and rules on this page are drawn from the official UK government sources below, using the confirmed 2026/27 figures. Each link opens the relevant HMRC, GOV.UK or Companies House page in a new tab.
The limited company tax calculator turns this guidance into a concrete estimate for corporation tax, dividends and personal take-home, based on 2026/27 HMRC rates.