The question is not "which is better", it is "who pays the employer costs"
Both routes end up taxed by HMRC, but they differ in one structural way that explains almost every pound of the gap: an umbrella company is your employer, so employment taxes (employer National Insurance and the apprenticeship levy) have to be funded out of the rate the agency pays for you. A personal limited company outside IR35 pays you a small salary and distributes the rest as dividends, and dividends carry no National Insurance at all.
That is the whole game. Everything else (margins, holiday pay, expenses, accountancy fees) is noise around a 15 percent employer NI charge and a 0.5 percent levy that either sit inside your rate or do not.
What is actually inside the umbrella "assignment rate"
When an agency quotes an umbrella contractor £500 a day, that is the assignment rate (sometimes called the limited company rate or the uplifted rate). It is not your gross pay. HMRC's own guidance on working through an umbrella company is explicit that the umbrella deducts employment costs from that figure before it arrives at the gross pay it puts through PAYE.
The deductions, in order:
- Umbrella margin. The umbrella's own fee, typically £15 to £30 a week or £90 to £130 a month. It is the only part that is genuinely the umbrella's income.
- Employer's National Insurance at 15 percent on gross pay above the £5,000 a year secondary threshold (HMRC, rates and thresholds for employers 2025 to 2026).
- Apprenticeship levy at 0.5 percent of the pay bill. Umbrellas run pay bills far above the £3 million threshold, so the £15,000 annual levy allowance is spread across thousands of workers and is worth pennies to you.
- Employer pension contribution, if you have not opted out of auto-enrolment.
- Holiday pay, which is not a deduction at all: it is carved out of your own gross pay, usually at 12.07 percent, reflecting 5.6 weeks of statutory leave (GOV.UK holiday entitlement). Rolled up or accrued, it is your money either way.
What is left is your gross taxable pay, which then suffers income tax and employee NI like any salary. HMRC even publishes a tool to work out pay from an umbrella company so you can sanity-check a payslip.
The 2025/26 numbers that decide it
| Item | 2025/26 (England, Wales, NI) | Source |
|---|---|---|
| Personal allowance | £12,570 | gov.uk/income-tax-rates |
| Basic rate 20% | First £37,700 of taxable income (to £50,270) | gov.uk |
| Higher rate 40% | £50,271 to £125,140 | gov.uk |
| Additional rate 45% | Above £125,140 | gov.uk |
| Employee NI (Class 1) | 8% from £12,570 to £50,270, then 2% | HMRC |
| Employer NI (secondary) | 15% above £5,000 a year secondary threshold | HMRC |
| Employment Allowance | £10,500, but not for a single-director company where the director is the only employee over the threshold | NIM06545 |
| Apprenticeship levy | 0.5% of pay bill over £3m (£15,000 allowance) | HMRC |
| Corporation tax | 19% to £50,000; 25% above £250,000; marginal relief between (26.5% effective marginal) | gov.uk/corporation-tax-rates |
| Dividend allowance | £500 | gov.uk/tax-on-dividends |
| Dividend rates | 8.75% / 33.75% / 39.35% | gov.uk |
| National Living Wage (21+) | £12.21 an hour | HMRC |
Two of those rows do most of the damage. The secondary threshold fell to £5,000 and the employer rate rose to 15 percent from 6 April 2025, so almost your entire umbrella gross pay is now exposed to employer NI. And a one-person limited company cannot claim the £10,500 Employment Allowance, so it eats employer NI on the director's salary too.
Worked example: £500 a day, 220 billable days, umbrella
Assignment rate income: 220 × £500 = £110,000. Margin £100 a month = £1,200. Pension opted out. That leaves £108,800 to cover employer NI, the levy and your gross pay.
Solve for gross pay G, where G + 15% × (G − £5,000) + 0.5% × G = £108,800:
- Gross taxable pay: £94,848
- Employer NI: 15% × (94,848 − 5,000) = £13,477
- Apprenticeship levy: 0.5% × 94,848 = £474
- Income tax: (94,848 − 12,570) = 82,278, so £37,700 at 20% (£7,540) plus £44,578 at 40% (£17,831) = £25,371
- Employee NI: 8% × £37,700 (£3,016) plus 2% × £44,578 (£892) = £3,908
Net take-home: £65,569, or 59.6 percent of the assignment rate. The £13,477 of employer NI and £474 of levy came out of your money, not the umbrella's.
Same £500 a day through your own limited company (outside IR35)
Invoiced £110,000 plus VAT. Running costs of £2,000 (accountant, professional indemnity, public and employers' liability, software). Salary set at £12,570, the personal allowance, because in the marginal relief band the corporation tax saved on the salary and its employer NI (26.5p per £1) beats the 15p of employer NI it triggers.
- Employer NI on salary: 15% × (12,570 − 5,000) = £1,136
- Taxable profit: 110,000 − 2,000 − 12,570 − 1,136 = £94,295
- Corporation tax with marginal relief: 25% × 94,295 = £23,574, less relief of 3/200 × (250,000 − 94,295) = £2,336, giving £21,238 (an effective 22.5%)
- Distributable profit: £73,056 in dividends
- Dividend tax: £500 allowance at 0%, £37,200 at 8.75% (£3,255), £35,356 at 33.75% (£11,933) = £15,188
Net take-home: £12,570 salary + £73,056 dividends − £15,188 tax = £70,439.
The limited company wins by £4,870 a year, about 4.4 percent of turnover. Real, but a long way from the "save 30 percent" folklore. Run your own figures in the UK contractor take-home calculator.
Head to head across day rates
Same assumptions (220 days, £100 monthly umbrella margin, £2,000 company running costs, £12,570 salary, all profit distributed, no pension):
| Day rate | Annual rate | Umbrella net | Limited net | Ltd advantage |
|---|---|---|---|---|
| £150 | £33,000 | £23,811 | £25,397 | +£1,586 |
| £200 | £44,000 | £30,668 | £33,527 | +£2,859 |
| £250 | £55,000 | £37,525 | £41,657 | +£4,133 |
| £300 | £66,000 | £43,474 | £49,013 | +£5,539 |
| £400 | £88,000 | £54,522 | £59,726 | +£5,204 |
| £500 | £110,000 | £65,569 | £70,439 | +£4,870 |
The break-even day rate, and the crossover nobody mentions
There are two break-evens, not one.
The lower one is around £150 to £175 a day. At £150 a day the company nets you roughly £1,590 more after its running costs. That is real money, but it is the price of Companies House filings, a corporation tax return, VAT returns, a business bank account, RTI payroll, a confirmation statement and personal liability for getting any of it wrong. Below about £150 a day, the umbrella is usually the rational choice even outside IR35.
The upper one is a genuine crossover at the margin. Look at the table again: the limited company's advantage peaks around £300 a day and then shrinks. That is not a rounding error. Once company profits pass £50,000 and dividends pass the higher rate threshold, each extra £1 of profit is taxed at 26.5 percent corporation tax and then 33.75 percent dividend tax, so you keep 48.7p. Through an umbrella, each extra £1 of assignment rate becomes 86.6p of gross pay (after 15 percent employer NI and 0.5 percent levy) and then loses 40 percent tax and 2 percent NI, so you keep 50.2p.
Above roughly £300 a day, the marginal pound is actually taxed slightly more heavily inside a limited company than inside an umbrella. The company still keeps a cumulative lead built up in the lower bands, but that lead stops growing. Anyone telling you the incorporation gap widens forever with your rate has not done the arithmetic at 2025/26 rates.
IR35 settles the argument before the maths starts
None of the above applies if the engagement is inside IR35. Under the off-payroll rules, a medium or large end client decides your status, and if the determination is "inside", your limited company receives a deemed employment payment that has already had PAYE and employee NI taken off by the fee payer, with employer NI and the levy funded from the contract rate anyway. You get no dividend planning, no meaningful expense relief, and you still pay for an accountant.
Inside IR35, an umbrella is usually the better answer purely because it is the same tax bill with less admin. Check the engagement first with HMRC's Check Employment Status for Tax tool and model the outcome with our IR35 calculator before you choose a structure.
The lever that can flip the answer back to umbrella: pension
Salary sacrifice into a pension through an umbrella is the single most efficient move available to a contractor. Money sacrificed from the assignment rate escapes income tax, employee NI, the 15 percent employer NI and the 0.5 percent levy. On the £500 a day example, sacrificing £20,000 of assignment rate diverts roughly £17,300 into your pension (after the umbrella's employment costs) for a take-home cost of about £10,000, because you were only ever going to keep 50p of each of those pounds.
A limited company gets a comparable result (employer pension contributions are deductible for corporation tax and free of NI), so pensions do not automatically favour one route. But they do compress the gap: if you are pension-heavy, the extra £4,870 in the example above shrinks quickly, and the umbrella's simplicity starts to look cheap.
What changed on 6 April 2026
Two changes matter for anyone modelling forward.
First, dividend tax rose by 2 percentage points: the ordinary rate went from 8.75 to 10.75 percent and the upper rate from 33.75 to 35.75 percent, with the additional rate unchanged at 39.35 percent (HMRC policy paper). Apply that to the £500 a day example and the company's dividend tax bill rises from £15,188 to £16,640, cutting the limited company advantage from £4,870 to roughly £3,417 a year, because umbrella PAYE is unchanged (thresholds are frozen and NI rates are the same in 2026/27).
Second, from 6 April 2026 the responsibility to account for PAYE on umbrella workers moves to the recruitment agency (or to the end client where there is no agency), with joint and several liability for unpaid payroll taxes. Practically, this should kill off the disguised remuneration schemes that promised 85 percent take-home. If an umbrella still offers you that in 2026, walk away: no compliant umbrella can beat the arithmetic above.
How to decide, in order
- Status first. Inside IR35 or a short single engagement: umbrella. Outside IR35 with multiple clients: consider a company.
- Rate second. Under about £150 a day, or under about 30 weeks of work a year, the company's advantage will not repay the admin.
- Duration third. Incorporating for a six-month gig then striking off is a lot of paperwork for a partial year of savings. If you plan to contract for years, incorporate.
- Retained profit fourth. If you can leave profit in the company rather than distributing everything, the picture improves: profit taken out later on a solvent liquidation can qualify for Business Asset Disposal Relief, taxed at 18 percent from 6 April 2026 (14 percent for 2025/26 disposals) up to the £1 million lifetime limit, subject to the targeted anti-avoidance rules on phoenixing.
- Then check the margin and the payslip. Compare umbrella quotes on margin alone, and reconcile every payslip: assignment rate, minus margin, minus employer NI, minus levy, equals gross. If those five lines do not reconcile, ask why.
Scottish taxpayers should note the picture tilts further toward a limited company: Scottish income tax rates apply to your umbrella salary but not to dividends, which are taxed at UK rates.