Umbrella Company vs. PAYE vs. Limited Company

Umbrella Company vs. PAYE vs. Limited Company: Which Is Right for Contractors? 

If you’re freelancing or working contract roles in the UK, how you get paid is more than just a technicality – it directly impacts your take-home pay, your taxes, your legal responsibilities, and your admin workload. There are three common options: umbrella company, PAYE through an agency, or setting up your own limited company. Here’s a breakdown to help you make the right choice. 

Frequently Asked Questions 

What is an umbrella company?  

An umbrella company is a third-party employer that acts as an intermediary between you (the contractor), your recruitment agency, and the end client. You submit timesheets to the umbrella company, which invoices the client or agency, collects the payment, deducts tax and National Insurance contributions, and then pays you a salary. 

Umbrella companies typically charge a weekly or monthly fee, which is deducted before you receive your net pay. 

Pros: 

• Simple setup, minimal admin

• Includes statutory employee benefits like sick pay, holiday pay, and maternity/paternity leave

• Ideal for short-term contracts or first-time contractors

Cons: 

• Slightly lower take-home pay due to umbrella fees and full PAYE taxation

• Less control over how income is distributed

What does working via PAYE through a recruitment agency mean?

Some agencies, like ADLIB, will place you directly on their payroll. This means you’re paid as a temporary employee. Tax and National Insurance are deducted automatically, and you receive a payslip just like a permanent employee. 

Pros: 

• Easy to manage – no need to worry about tax returns

• Access to employment rights such as sick pay and pension auto-enrolment

• Great for short-term or entry-level roles

Cons: 

• Least flexibility

• Lower take-home pay compared to a limited company

What is a limited company (Ltd)?

Setting up a limited company gives you full control. You become the director and shareholder of your own business, invoice clients directly, and pay yourself via salary and dividends. This can result in a higher take-home pay but requires you to handle your own bookkeeping, tax returns, and compliance. 

Pros: 

• Maximum control over finances

• Potential for higher take-home pay via tax-efficient dividend payments

• Professional appearance for long-term or high-value contracts

Cons: 

• You’re legally responsible for the company’s compliance

• Requires accounting knowledge or the hiring of an accountant

• Not suitable for short-term or low-value contracts

Which option gives me the highest take-home pay?

Generally, limited companies offer the highest take-home pay due to the ability to pay dividends, which are taxed at a lower rate than income. However, the benefits only outweigh the costs if your contract rate and duration justify the administrative effort. 

What about IR35?

IR35 is a tax legislation designed to prevent “disguised employment”. If your contract falls inside IR35, you must pay tax as though you’re an employee. In this case, operating through an umbrella company or PAYE may be the better choice. IR35 assessments are made based on the working relationship and contract terms. 

How do I choose between the three?

Your choice depends on: 

• Contract length and value

• Your appetite for admin

• Your IR35 status

• Whether you want employment rights (like holiday pay) or tax efficiency