PAYE vs Umbrella vs Limited Company: How Should Contractors Get Paid?

By Tech Accounting · Last updated July 2026

If you’re weighing up PAYE vs umbrella vs limited company, you’re deciding how to get paid for your contract work. As a contractor you provide a service to a business for a fixed period, but there’s more than one way to be paid for it, and each has very different tax, take-home and admin. This guide walks you through the options in plain English, shows what you’d actually take home in 2026/27, and explains how IR35 decides which route makes sense for you.

We’re accountants who specialise in contractors working outside IR35, so we’ll be straight with you about when going limited is worth it — and when it isn’t.

The fundamentals: how contractors get paid

Let’s start simple. A contractor provides a service to a business for a set period of time. For that fixed-term work, you can be paid in one of four ways:

• PAYE employee — the end client or agency employs you directly and runs your payroll.
• Umbrella company employee — a separate company employs you and supplies your services to the client.
• Sole trader — you’re self-employed with no company (rare for contract work; more below).
• Your own limited company — you set up a company that invoices the client.

They’re all contracting. What changes is who employs you and how you’re taxed — and that’s what decides your take-home. Which route suits you leans heavily on IR35, so we’ll cover that first, but here’s the quick map:

Keep that map in your head. Now the concept that decides everything.

What is IR35, and what do “inside” and “outside” mean?

IR35 (the “off-payroll working rules”) is a tax test. It asks a simple question: are you genuinely running a business, or are you really doing the job of an employee and using a company to pay less tax? If it’s the latter, HMRC wants you taxed like an employee.

It only matters if you contract through a limited company, so it’s the single biggest factor in whether going limited is worth it.

What does “outside IR35” mean?

Being outside IR35 means HMRC accepts you’re a genuine business: you carry real commercial risk, you’re not tied to one client like an employee, and you control how you work. You keep the full limited-company tax model: a small salary topped up with dividends, and Corporation Tax on your profits. This is the position our clients are in, and it’s where limited comfortably wins. You can read more in our guide to working outside IR35.

What does “inside IR35” mean?

Being inside IR35 means HMRC treats you as an employee for tax, even though you work through a company. Income tax and National Insurance come off at source, and the dividend advantage that makes a limited company efficient largely disappears. That’s exactly why contractors on inside-IR35 roles usually use an umbrella instead — there’s little point running a company if you’re taxed as an employee anyway.

What decides your status?

Status is judged per contract, not per person — you could be outside IR35 on one role and inside on another. The main tests are:

• Control — if the client dictates how, when and where you work, that looks like employment.
• Substitution — if you must do the work personally and can’t send a qualified substitute, that points to employment.
• Mutuality of obligation — if the client must keep offering you work and you must accept it, that’s employee-like.
• Financial risk — genuine self-employment carries real financial risk, for example not being paid if the work isn’t delivered.

Since April 2021, for most private-sector contracts it’s the end client (not you) who decides your status. It’s worth getting this right, because it drives everything below. Not sure where you stand? Our IR35 hub gives you a quick read.

What is a limited company contractor? (contracting outside IR35)

This is where you set up your own limited company and it invoices your client. You’re a director and shareholder, so you can pay yourself a mix of salary and dividends, as well as having more flexibility on expenses — and that mix is what makes it tax-efficient.

In short: your company pays Corporation Tax on its profits, then you draw the rest as dividends, which are taxed at lower rates than salary. You also control everything — your money, your pension contributions, what you claim as expenses.

The trade-off is responsibility. You run a company, deal with the admin and file accounts. When you’re genuinely outside IR35 and contracting for the medium-to-long term, that extra admin is well worth it. That’s the client we’re built for, whether you need IT contractor accountants or limited company accountants more broadly.

What is an umbrella company? (contracting, but employed by the umbrella)

An umbrella company employs you, then supplies your services to the client through the agency. You do the work; the umbrella runs the payroll.

Here’s the bit that surprises people. The rate you’re quoted is usually the assignment rate — the total pot the agency pays the umbrella. Out of that pot come costs that, as an employee, you’d never normally see:

• the umbrella’s margin
• employer’s National Insurance (15% in 2026/27 on pay above £5,000), and
• the Apprenticeship Levy (0.5%).

Only what’s left becomes your gross salary, which is then taxed as normal employment income. You do get statutory employment rights — holiday pay, sick pay, a pension.

The April 2026 umbrella rule change

From 6 April 2026, responsibility for making sure PAYE is operated correctly on umbrella payrolls shifted onto the recruitment agency or end client in the labour supply chain. If an umbrella doesn’t pay the right PAYE to HMRC, HMRC can now recover it from the agency or client. In practice this is pushing agencies towards compliant umbrellas — good news if you’re using one, but worth knowing the landscape has changed.

What is a PAYE contractor? (employed directly by the client)

Here, the end client or agency employs you directly on a fixed-term contract and runs your payroll. Income tax and National Insurance come off before you’re paid, and the employer pays employer’s NI on top of your salary. You get the full set of employment rights — holiday, sick pay, pension — and none of the admin.

This is the difference between PAYE and umbrella: with PAYE the client or agency is your employer; with umbrella, a separate company is. Either way you’re taxed as an employee, so there’s no IR35 question and no company to run, but also none of the flexibility or tax planning that comes with going limited.

One thing to watch: because the employer pays NI on top of your salary (rather than out of your rate), a PAYE salary and a day-rate assignment aren’t a like-for-like comparison.

PAYE vs umbrella, side by side

What about sole trader?

Worth a quick word, because people ask. A sole trader is self-employed with no company in between — you invoice the client directly and pay income tax plus Class 2/4 National Insurance on your profits. There’s no Corporation Tax and no dividends.

If one company is your only client, HMRC may decide your “employment status” is wrong — that you’re really employed but registered as a sole trader to pay less tax — and pursue the unpaid National Insurance and tax. So while sole traders aren’t caught by IR35, that doesn’t leave you free of consequences, and it’s why agencies rarely engage contractors this way.

Take-home pay compared: a 2026/27 worked example

Let’s make it concrete. Take a contractor on £450 a day, working roughly 48 weeks — an assignment worth about £108,000 a year. Here’s how limited (outside IR35) and umbrella compare, using 2026/27 rates.

Limited assumes a £12,570 salary plus dividends and £4,000 of business expenses (including £1,200 accountancy), which a company outside IR35 can claim tax relief on; the umbrella worker pays for the same £2,800 of travel out of taxed income, with no relief. Umbrella margin is about £100 a month. Figures are indicative and rounded; your actual take-home depends on expenses, pension and your specific rate. Run your own numbers with our interactive outside IR35 vs umbrella calculator.

The limited route comes out ahead here, by around £5,300 a year. The size of that advantage depends on your rate, your expenses and how you draw money from the company, and it only holds while you’re outside IR35.

A word on PAYE: when the client employs you directly, they pay employer’s NI on top of your salary (rather than out of your rate). On the same assignment rate, PAYE lands close to umbrella — a touch higher, since there’s no umbrella margin. But if you’re offered a straight salary instead of a day rate, don’t compare the two headline numbers directly: day rates are higher precisely because they have to cover those employer costs and come with no benefits.

Tax treatment side by side

The reason the numbers differ comes down to how each pound is taxed:

• Limited (outside IR35): Corporation Tax on company profit (19% on profits up to £50,000, rising towards 25% above that via marginal relief), then dividend tax at 10.75% / 35.75% / 39.35% depending on your band, with a £500 tax-free dividend allowance.
• Umbrella / PAYE: all your income is salary, taxed at 20% / 40% / 45% income tax, plus employee National Insurance at 8% (then 2% above £50,270). With umbrella, employer NI and the margin are taken from the assignment rate first.

Same work, very different tax journey: that’s the whole story in one paragraph.

So which should you choose? IR35 is the deciding factor

Strip away the detail and it comes down to your IR35 status and how long you’re contracting for:

• Outside IR35, contracting for the medium-to-long term, on a decent rate? A limited company almost always leaves you better off, and gives you control over pensions, expenses and timing. This is our world.
• Inside IR35, or on a short or one-off contract, or just testing the water? An umbrella keeps things simple, gives you employment rights, and avoids running a company for little tax gain.
• Want employment simplicity and the client will put you on their payroll? PAYE (employed directly) gives you the same rights and zero admin — a perfectly sensible choice when tax planning isn’t the priority.

What if I’m inside IR35? Then the limited-company tax advantage mostly disappears, and umbrella is usually the pragmatic answer, at least until you land an outside-IR35 role. Check your status first with our IR35 hub.

Admin, cost and liability compared

• Setup: A limited company costs £100 to register with Companies House online, although there are banks that offer heavily discounted rates so long as you open a bank account with them. Umbrella and PAYE tend to have no setup costs.
• Ongoing: With limited, you’ll want an accountant (our fees are fixed and include FreeAgent free), but you get a plethora of benefits in return: a limited company is more tax-efficient and gives you far more options over pensions, expenses and how you pay yourself. With umbrella, you pay the monthly margin instead. PAYE costs you nothing to run.
• Liability: A limited company gives you limited liability and a clear separation between you and the business. As an umbrella or PAYE employee, that’s your employer’s concern, not yours.
• Effort: Limited means filing accounts and staying on top of deadlines; a good accountant makes this light-touch. Umbrella and PAYE are effectively hands-off.

Getting started as a contractor

If there’s one thing to take away, it’s this: work out your IR35 status first, then choose your route. Outside IR35 and in it for the long haul? Limited is very likely your best home. Inside IR35, or just dipping a toe in? Umbrella keeps life simple. Want the client to employ you directly with no admin? PAYE does the job.

*Figures are for the 2026/27 tax year (rest of UK rates), are rounded and are for illustration only. They are not tax advice; your own position depends on your rate, expenses, pension and circumstances.