The choice between operating through a limited company and using an umbrella company depends primarily on the IR35 status of your contracts. Understanding when each structure makes financial and practical sense helps you make the right decision.
When to use a limited company
A limited company is the most tax-efficient structure for contracts that fall outside IR35. You benefit from the salary and dividend split, can claim business expenses, make employer pension contributions, and retain profits within the company for later distribution. If you consistently work outside IR35, a limited company is almost always the better choice.
When to use an umbrella
If your contracts are inside IR35, the tax advantages of a limited company largely disappear. You cannot take dividends tax-efficiently because the deemed employment payment rules apply at source. In this scenario, an umbrella company simplifies administration. You submit timesheets, and the umbrella handles invoicing, payroll, and tax deductions. You receive a net salary with no company admin to manage.
The hybrid approach
Many experienced contractors maintain their limited company but use an umbrella for specific inside IR35 engagements. This preserves their company for future outside IR35 contracts while avoiding the administrative burden of running inside IR35 payments through their own PAYE. Your accountant can advise on whether this approach makes sense for your situation.
Cost comparison
Running a limited company costs approximately £100–£150 per month in accountancy fees, plus insurance and minor administrative costs. An umbrella company charges £20–£30 per week (£80–£120 per month). The costs are broadly similar, but the limited company offers significantly better tax efficiency for outside IR35 work. For inside IR35 work, the umbrella is marginally cheaper and involves less personal admin.
Making the switch
If you currently operate through a limited company and all your contracts have moved inside IR35, you do not necessarily need to close your company. You can keep it dormant at minimal cost and reactivate it when outside IR35 opportunities arise. Closing a limited company and then reopening one later involves more time and expense than simply maintaining a dormant company.