Tax Efficiency Comparison Umbrella Company vs Limited Company
- Marzena Rokita

- 4 days ago
- 3 min read

Employment with Additional Contract Work
Umbrella Company vs Limited Company (Outside IR35)
1. Overview
This document provides a structured comparison of tax efficiency for an individual in stable employment who is considering additional contract work. The comparison evaluates engagement via an umbrella company versus operating through a limited company, where the contract work is assumed to be outside IR35.
The purpose of this document is to outline cost implications, tax treatment, and overall take-home pay considerations, supported by HMRC guidance and professional sources.
2. Scenario Assumptions
Category | Assumption |
Primary income | Employment salary: £41,000 per annum |
Additional income | Contract work: ~£387 per week (~£20,124 per annum) |
IR35 status | Outside IR35 |
Limited company activity | Contract work and small home-based business |
Working pattern | Contract income assumed to be ongoing |
3. Option A – Employment Plus Umbrella Company
3.1 Income Composition
Source | Amount (£) |
Salary | 41,000 |
Umbrella contract income | ~20,000 |
Total gross income | ~61,000 |
3.2 Tax Treatment
All umbrella income is processed as PAYE employment income.
Income Tax and National Insurance Contributions (NICs) are deducted at source.
Umbrella company fees and employer NICs are effectively borne by the worker.
Business expenses cannot usually be claimed.
3.3 Key Characteristics
Advantages
Minimal administration.
PAYE compliance handled by the umbrella company.
Suitable for short-term or low-value contracts.
Disadvantages
Higher effective tax and NIC burden.
No flexibility over income extraction.
Weekly umbrella fees reduce take-home pay.
No expense deduction.
4. Option B – Limited Company (Salary and Dividends)
4.1 Operational Overview
A limited company is a separate legal entity. Where work is outside IR35, income can be taken in a tax-efficient mix of salary and dividends.
4.2 Typical Remuneration Structure
Item | Amount (£) |
Contract income | ~20,000 |
Salary | 12,570 (personal allowance) |
Remaining profits | ~18,000 (before dividends & expenses) |
Salary up to the personal allowance minimises Income Tax and NICs.
Dividends are taxed at lower rates than employment income.
Dividends are not subject to employee NICs.
4.3 Allowable Business Expenses
Examples include:
Accounting and bookkeeping fees
Software subscriptions (e.g. Xero)
Home office usage
Business insurance
Professional services
These expenses reduce taxable profit before Corporation Tax.
4.4 Advantages
Greater control over income timing and structure.
Lower overall tax burden for outside IR35 work.
Legitimate expense deductions.
No umbrella margin or hidden employer NIC deductions.
4.5 Considerations
Ongoing compliance with HMRC and Companies House.
Annual accounts and tax returns required.
Professional accountancy support strongly recommended.
5. Umbrella Company – Weekly Cost Breakdown (Illustrative)
Cost Type | £ | Description |
Employer NI | 21.34 | Employer NICs passed to worker |
Employer pension | 3.55 | Deducted from assignment rate |
Apprenticeship levy | 1.19 | Government levy |
Umbrella margin | 23.00 | Weekly payroll fee |
Salary sacrifice NI saving | 0.89 | Structural deduction |
Expenses (non-taxable) | 92.85 | No reimbursement benefit |
6. Limited Company – Annual Costs
Item | Cost (£) | Frequency |
Bookkeeping | 720 | Annual |
Xero subscription | 444 | Annual |
Company formation | 250 | One-off |
Accountant fees | 850 | Annual |
Bank & insurance | 240 | Annual |
Total annual cost | 2,504 |
7. Umbrella Company – Annual Costs
Item | Cost (£) |
Weekly umbrella fee (£50 × 52) | 2,600 |
Expense deductions | 0 |
Total annual cost | 2,600 + full PAYE/NICs |
8. Summary Comparison
Structure | Annual Fees (£) | Key Notes |
Limited company | 2,504 | Expense deductions, dividend flexibility |
Umbrella company | 2,600+ | Simpler but higher effective tax |
Key Observations
Limited company costs are lower on fees alone.
Expense deductions further improve tax efficiency.
Umbrella arrangements result in higher tax and less control.
For meaningful outside IR35 income, a limited company generally provides higher net take-home pay.
9. HMRC and Legal Overview
Umbrella Companies
Umbrella companies must operate PAYE.
Workers should avoid schemes promising excessive tax savings.
New PAYE supply chain rules apply from 6 April 2026.
Limited Companies
Must comply with Corporation Tax, dividend reporting, and statutory filings.
Dividends are taxed separately from PAYE income.
HMRC permits expense deductions where wholly and exclusively for business.
10. Professional & HMRC Reference Links
HMRC – PAYE rules for umbrella supply chainshttps://www.gov.uk/guidance/paye-rules-for-labour-supply-chains-that-include-umbrella-companies-from-6-april-2026
HMRC – Warning on umbrella tax avoidance schemeshttps://www.gov.uk/guidance/warning-for-agency-workers-and-contractors-employed-by-umbrella-companies-spotlight-60
Contractor tax comparison (professional guidance)https://www.rsbc.uk/resources/rsbc-guides/understanding-limited-vs-umbrella-companieshttps://www.golimited.co.uk/tips/paye-vs-umbrella-vs-limited-company




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