The single biggest financial decision for a UK contractor is whether to work through a limited company or an umbrella company. This guide gives you the full breakeven model with actual numbers for 2026/27, so you can make the decision on evidence rather than guesswork.
The Core Difference in Tax Treatment
Umbrella company: You are an employee of the umbrella. You pay Income Tax and National Insurance (both employee and employer NI, absorbed into your rate) on all earnings. Simple, but tax-inefficient at higher earnings.
Limited company (outside IR35): You pay yourself a low salary (typically at the NI threshold: £9,100/year in 2026/27) and draw the rest as dividends. Dividends are taxed at lower rates than salary and are not subject to NI.
| Tax | Salary via umbrella | Salary via ltd | Dividend via ltd |
|---|---|---|---|
| Income Tax | 20–45% | 20–45% | 8.75–39.35% |
| Employee NI | 8% (up to UEL) | 8% (up to UEL) | 0% |
| Employer NI | Absorbed into rate | Absorbed into rate | 0% |
| Corporation Tax first | No | No | 19–25% on profit |
The Full Comparison at Common Day Rates (2026/27)
The following assumes: 200 working days/year; limited company accountant cost £2,400/year; company running costs (total) £3,000/year; salary at £9,100 (NI secondary threshold); remaining profit taken as dividends; basic rate taxpayer for most of these examples.
| Day rate | Annual fees | Umbrella take-home | Ltd co take-home | Ltd advantage |
|---|---|---|---|---|
| £200/day | £40,000 | ~£28,500 | ~£28,800 | ~£300 |
| £250/day | £50,000 | ~£34,500 | ~£36,500 | ~£2,000 |
| £300/day | £60,000 | ~£40,000 | ~£43,500 | ~£3,500 |
| £350/day | £70,000 | ~£46,000 | ~£51,000 | ~£5,000 |
| £400/day | £80,000 | ~£49,000 | ~£56,000 | ~£7,000 |
| £500/day | £100,000 | ~£57,000 | ~£67,000 | ~£10,000 |
| £600/day | £120,000 | ~£65,000 | ~£78,000 | ~£13,000 |
Estimates based on 2026/27 rates. Actual figures depend on personal circumstances, dividend allowance, pension contributions, and company costs.
Detailed Worked Example — £400/Day Contractor
Gross annual income: £80,000 (£400 × 200 days)
Via Umbrella Company
| Item | Amount |
|---|---|
| Gross contract value | £80,000 |
| Less umbrella margin | −£1,200 (£100/month) |
| Less Employer’s NI (15% on earnings above £9,100) | −£10,635 |
| Gross salary | £68,165 |
| Less Income Tax (20% basic + 40% above £50,270) | −£15,092 |
| Less Employee NI (8% up to £50,270, 2% above) | −£4,413 |
| Net take-home | ~£48,660 |
Via Limited Company (Outside IR35)
| Item | Amount |
|---|---|
| Gross contract income | £80,000 |
| Less company running costs (accountant, insurance etc.) | −£3,000 |
| Less salary to director (£9,100) | −£9,100 |
| Less Employer’s NI on salary (minimal at this level) | −£0 (below secondary threshold) |
| Remaining profit | £67,900 |
| Less Corporation Tax (19%) | −£12,901 |
| Profit after CT | £54,999 |
| Salary (already taxed: below personal allowance) | £9,100 |
| Dividend income | £54,999 |
| Less dividend allowance (£500) | −£500 |
| Taxable dividends | £54,499 |
| Income Tax on dividends (8.75% basic rate to £50,270 – £9,100 = ~£41,170 headroom) | −£3,602 |
| Income Tax on dividends above basic rate threshold (33.75% on remainder) | −£4,497 |
| Net take-home (salary + dividends after all tax) | ~£55,500 |
Ltd company advantage at £400/day: approximately £6,800/year.
The Breakeven Calculation
The breakeven point — where the ltd company take-home equals the umbrella take-home, after deducting company costs — is approximately:
Day rate: £250–£280/day (assuming 200 days/year worked)
Below this level:
- Company running costs (~£3,000/year) exceed the tax saving
- Umbrella is simpler with no real financial penalty
- The administration overhead is not worthwhile
Rule of thumb:
- Under £250/day → Umbrella is simpler and almost as profitable
- £250–£350/day → Limited company is marginally better; decision may rest on IR35 risk and admin preference
- Over £350/day → Limited company advantage is significant; worth the overhead
Inside IR35 — The Calculation Flips
If your contract is inside IR35, the limited company advantage largely disappears. HMRC’s deemed payment calculation means you effectively pay Income Tax and NI on your earnings as though you were employed — you just have the added cost of running a company.
Inside IR35 at £400/day:
- Ltd company take-home after deemed payment: approximately £48,000–£50,000
- Umbrella take-home: approximately £48,000–£50,000
- Ltd company has higher costs (accountant, Companies House) and no tax advantage
If all your contracts are inside IR35 and likely to remain so, an umbrella company is almost always preferable.
Other Factors to Consider
Ltd company advantages beyond tax:
- Can retain profits in the company and defer dividends to a lower-income year
- Can make pension contributions directly from the company (SIPP contributions as a company expense — very tax efficient)
- More flexible for working with multiple clients
- Can build a small business with employees in future
Umbrella advantages:
- Employed status — potentially eligible for some employment protections
- No accountant fees or Companies House admin
- Simpler for IR35-inside contracts
- Easier IR35 compliance — umbrella takes the responsibility