Every contractor in the UK must decide how to structure their working arrangement. The three main options — agency PAYE, umbrella company, and limited company — each have different tax implications, admin requirements, and suitability for different situations.
The Three Structures at a Glance
| Feature | Agency PAYE | Umbrella Company | Limited Company |
|---|---|---|---|
| Employment status | Employed by agency | Employed by umbrella | Self-employed (company director) |
| Who pays your tax? | Agency via PAYE | Umbrella via PAYE | You, via Self Assessment + corporation tax |
| IR35 relevant? | No (already employed) | No (already employed) | Yes — determines tax treatment |
| Tax efficiency | Lowest | Low-Medium | Highest (outside IR35) |
| Admin burden | None | Minimal | Moderate (accounts, returns, VAT) |
| Setup cost | None | None | £15–£100 (Companies House) |
| Running cost | None | £20–£30/week margin | £100–£200/month (accountant) |
| Holiday/sick pay | Agency-dependent | Accrued from your pay | None (self-funded) |
Agency PAYE
The simplest option. You’re employed directly by the recruitment agency, which handles all tax, NI, and payslip administration.
How It Works
- Agency finds you the contract
- Client pays the agency
- Agency deducts their margin, employer NI, and your PAYE tax
- You receive a net payslip like any employee
Take-Home Example — £400/Day
| Item | Amount |
|---|---|
| Gross annual (220 days) | £88,000 |
| Agency margin (typically 10–15%) | -£8,800 |
| Employer NI (13.8%) | -£9,415 |
| Your gross pay | £69,785 |
| Income Tax | -£15,243 |
| Employee NI | -£4,369 |
| Take-home | £50,173 |
Who Should Use Agency PAYE
- Short-term assignments (weeks, not months)
- Roles where the agency insists on PAYE
- People who want zero admin
- Very low day rates where other structures aren’t cost-effective
Drawbacks
- Highest tax burden — employer NI comes from your rate, not on top of it
- Least flexibility — no expense claims, no tax planning
- Agency takes a cut — margins are often larger than umbrella fees
Umbrella Company
An umbrella company employs you on its payroll while you work at various client sites through agencies. It’s the standard route for inside IR35 contracts and new contractors.
How It Works
- You register with an umbrella company
- Agency pays your day rate to the umbrella
- Umbrella deducts its margin (typically £20–£30/week), employer NI, and PAYE
- You receive a payslip with tax and NI deducted
- Some expenses may be claimed (travel, subsistence) depending on contract
Take-Home Example — £400/Day
| Item | Amount |
|---|---|
| Gross annual (220 days) | £88,000 |
| Umbrella margin (£25/week × 44 weeks) | -£1,100 |
| Employer NI (13.8% above threshold) | -£10,748 |
| Apprenticeship levy (0.5%) | -£434 |
| Your gross pay | £75,718 |
| Income Tax | -£17,088 |
| Employee NI | -£4,834 |
| Take-home | £53,796 |
Key Things to Know
- Employer NI comes from your rate — this is the biggest misconception. The umbrella deducts employer NI before calculating your gross pay, which is why your payslip looks lower than expected
- Holiday pay is accrued — umbrella companies must accrue holiday pay (12.07% of gross). You can receive it weekly/monthly or save it up
- Expenses are limited — since the off-payroll working rules changed, most umbrella contractors can only claim expenses for travel to temporary workplaces
- Beware non-compliant umbrellas — stick to FCSA-accredited umbrella companies. Tax avoidance schemes disguised as umbrellas can leave you with massive unexpected tax bills
Who Should Use an Umbrella
- Inside IR35 contracts (the standard route)
- Day rates under £350 (Ltd company benefits small)
- New contractors testing the waters
- Short contracts where Ltd company setup isn’t worthwhile
- People who want monthly payslips and minimal admin
Limited Company
The most tax-efficient option for contractors, particularly on outside IR35 contracts. You operate as director of your own company.
How It Works
- Set up a limited company with Companies House (£12–£50 online)
- Register for corporation tax and (if applicable) VAT
- Invoice the agency or client directly
- Company receives payment
- Pay yourself a combination of salary and dividends
- Company pays corporation tax on profits
- File annual accounts and company tax return
Take-Home Example — £400/Day Outside IR35
| Item | Amount |
|---|---|
| Gross annual (220 days) | £88,000 |
| Allowable expenses | -£5,000 |
| Director salary (tax-free level) | -£12,570 |
| Corporation tax (25% on £70,430) | -£17,608 |
| Available for dividends | £52,822 |
| Dividend tax (8.75% basic, 33.75% higher) | -£8,393 |
| Accountant and insurance | -£2,500 |
| Take-home | £57,499 |
Take-Home Example — £400/Day Inside IR35
Inside IR35 through a Ltd company triggers deemed payment rules:
| Item | Amount |
|---|---|
| Gross annual (220 days) | £88,000 |
| 5% expense allowance | -£4,400 |
| Employer NI (from deemed payment) | -£10,234 |
| Deemed salary | £73,366 |
| Income Tax | -£16,613 |
| Employee NI | -£4,646 |
| Accountant | -£1,800 |
| Take-home | £54,107 |
Inside IR35 through a Ltd company gives only £300 more than an umbrella at this rate — often not worth the extra admin and accountancy costs.
Who Should Use a Limited Company
- Outside IR35 contracts (clear tax advantage)
- Day rates above £300 (benefits outweigh costs)
- Long-term contractors (12+ months planned)
- People comfortable with basic business admin
- Those wanting to build up company reserves or make employer pension contributions
Side-by-Side Comparison — £400/Day
| Agency PAYE | Umbrella | Ltd (Outside IR35) | Ltd (Inside IR35) | |
|---|---|---|---|---|
| Take-home | ~£50,200 | ~£53,800 | ~£57,500 | ~£54,100 |
| Effective tax rate | ~43% | ~39% | ~35% | ~39% |
| Admin | None | Minimal | Moderate | Moderate |
| Annual running cost | Included | ~£1,100 | ~£2,500 | ~£2,500 |
| Pension | Agency scheme (if any) | Umbrella workplace pension | Self-funded (tax-efficient) | Self-funded |
Side-by-Side Comparison — £600/Day
| Umbrella | Ltd (Outside IR35) | Ltd (Inside IR35) | |
|---|---|---|---|
| Take-home | ~£74,500 | ~£85,000 | ~£75,200 |
| Effective tax rate | ~44% | ~36% | ~43% |
| Annual extra vs umbrella | — | +£10,500 | +£700 |
At higher day rates, the Ltd company advantage outside IR35 becomes substantial.
Decision Flowchart
Step 1: What’s Your IR35 Status?
- Inside IR35 → Umbrella company is usually the simplest and most practical
- Outside IR35 → Limited company almost always wins on take-home
- Unsure → Get a status determination from the end client (mandatory since April 2021 for medium/large businesses)
Step 2: What’s Your Day Rate?
- Under £250 → Agency PAYE or umbrella (Ltd costs eat into the benefit)
- £250–£350 → Umbrella if inside IR35; Ltd if outside
- £350+ → Ltd company if outside IR35; umbrella if inside
Step 3: How Long Will You Contract?
- Under 3 months → Umbrella (not worth Ltd setup)
- 3–12 months → Either, depending on IR35 status
- 12+ months → Ltd company if outside IR35
Step 4: How Comfortable Are You With Admin?
- Minimal effort → Umbrella
- Happy with quarterly accounts, VAT returns, annual filings → Ltd company
Switching Between Structures
You’re not locked in. Many contractors:
- Start with an umbrella while learning the market
- Move to a Ltd company once established on outside IR35 contracts
- Use their umbrella for inside IR35 work and Ltd for outside IR35 simultaneously
- Close their Ltd company if they return to permanent employment
Moving From Umbrella to Ltd
- Set up the company (1–2 days online)
- Register for corporation tax (and VAT if applicable)
- Appoint an accountant
- Inform your agency you’ll invoice through your Ltd company
- Open a business bank account
Closing a Ltd Company
If you stop contracting, you can close the company via:
- Strike off (if assets under £25,000) — simple and cheap
- Members’ voluntary liquidation — for companies with larger reserves (qualifies for Business Asset Disposal Relief at 10% CGT)