Umbrella company or Limited company ?
With a Master 2 in Business Law and Taxation, Marion makes the subtleties of law and wealth management accessible to everyone.
Choosing between an umbrella company and a Limited company is a key step for anyone looking to work as a freelancer in the UK. Both structures offer specific advantages depending on your profile, the length of your contracts, your preference regarding administrative tasks, and your exposure to IR35. While an umbrella company simplifies your life by acting as your employer and providing full social protection, a limited company gives you greater control and can improve both your take-home pay and your tax efficiency. Umbrella company vs Limited company: rely on our guide to understand the differences between these two legal structures and choose the one that best suits your personal and professional situation.
What are the main differences between an umbrella company and a limited company?
Characteristics of an umbrella company
An independent contractor can choose to carry out their assignments through an umbrella company. They sign an employment contract with the umbrella company while remaining free to choose their clients and negotiate their rates and working conditions.
However, it is the umbrella company that handles all administrative tasks:
it converts the contractor’s revenue into a salary;
it pays social contributions and income tax through (pay as you earn or PAYE);
it manages all tax-related obligations.
The umbrella company therefore acts as an intermediary between the contractor and their clients.
As a result, the contractor benefits from full employee-style protections, including maternity and paternity leave, statutory sick pay, pension contributions, paid holidays, etc.
Another advantage of umbrella companies: you don’t need to worry about IR35 compliance, as it does not apply to umbrella employees.
Characteristics of a Limited company
A Limited company (LTD) is an independent business structure that you create. It is a legal entity separate from you as an individual. Your professional activity is carried out through the company: contracts are signed by the company, and all revenue is paid to the company itself.
It is called a Limited company because its shareholders have liability limited to the capital they have invested. In practice, they are responsible for the company’s debts only up to the value of their shares. Their personal assets remain protected.
Setting up a Limited company is straightforward and can be done online through Companies House.
One of its key advantages is that contractors can optimise both their taxation and remuneration (salary and dividends), hire employees, bring in new shareholders, sell their shares, etc.
However, forming a Limited company also comes with significant obligations: filing various declarations, submitting annual accounts, paying Corporation Tax, and more.
Comparison table of main features
Limited companies offer greater flexibility in terms of remuneration and allowable business expenses, but they are affected by IR35 and must comply with more complex administrative obligations. Conversely, umbrella companies simplify life for contractors by handling their administrative and tax duties. In return, freelancers need to pay management fees.
| Criterion | Umbrella Company | Limited Company |
|---|---|---|
| Status | Employee | Shareholder/Director |
| Set-up process | Very simple | Longer, multi-step process |
| Administrative workload | Low (the umbrella company handles admin and tax duties) | High (filing annual accounts, Corporation Tax returns, etc.) |
| Tax optimisation | Moderate | High |
| Business expenses | Limited if you wish to hire | Extensive |
| IR35 impact | ✖️ Not applicable | ✔️ Applicable |
| Operating costs | Management fees paid to the umbrella company | Accounting and compliance costs |
News
After supporting thousands of freelancers in France, Jump is now bringing its umbrella services to the UK. Fully HMRC compliant and built to the highest UK standards, Jump offers a transparent, secure umbrella company solution you can trust.
How to choose between a limited company and an umbrella company?
The advantages and disadvantages of a limited company
A Limited company offers many advantages for independent professionals. For example:
the ability to combine salary and dividends to optimise take-home pay and taxation;
making tax-efficient pension contributions through the company;
benefiting from limited liability, restricted to the capital invested in the company;
enjoying greater professional credibility with partners and banks;
deducting business expenses from company revenue;
the possibility to grow the business by hiring employees or bringing in shareholders;
no minimum share capital required.
However, it also comes with disadvantages you should be aware of before setting up your company, such as:
a significant administrative burden (annual accounts, tax filings, Corporation Tax, bookkeeping, etc.);
reduced tax benefits if you fall inside IR35, as you will have to pay the same taxes and social contributions as employees;
very limited social protection compared to employment: most freelancers must take out several private insurance policies to secure a minimum level of cover, which increases both costs and complexity. In fact, contractors operating through a Limited company only benefit from a very minimal level of social protection by default.
Good to know:
IR35 is a tax legislation designed to identify “disguised employment”, situations where a contractor works like an employee but operates through a Limited company to benefit from tax advantages. When a contract falls inside IR35, the contractor must pay income tax and National Insurance just like an employee, which removes most of the tax benefits of a Limited company.
Because of this, many freelancers have moved away from the Limited company model, as IR35 can significantly reduce their net income while increasing their administrative burden.
The advantages and disadvantages of an umbrella company
Like a Limited company, an umbrella company also has advantages and disadvantages you should consider before choosing your freelance status.
Its main advantages include:
no administrative burden: you can focus on your work while the umbrella company handles everything (no accounting, no tax filings, etc.). It invoices your clients according to the terms you negotiated and pays you a monthly salary after deducting tax and social contributions through PAYE;
full employee social protection: sick pay, holiday pay, maternity/paternity pay, unemployment benefits, pension contributions, etc.;
access to an employer pension scheme, which is significantly more advantageous than personal pension contributions made as a sole trader or Limited company director : the UK State Pension provides only a basic level of retirement income, contributing through an umbrella pension scheme can substantially increase the amount you receive in retirement, while offering tax relief;
no complex set-up or closure process: you can become an umbrella employee within 24 hours and end your contract whenever you want;
no IR35 concerns: as umbrella employees are always treated as being inside PAYE.
However, it also comes with some drawbacks, such as:
management fees, since the umbrella company handles the entire administrative side of your activity;
limited business expense deductions; only expenses that a regular employee could claim are allowable (travel, accommodation, work-related equipment, etc.). Additional tax relief is possible for business expenses incurred on an umbrella assignment, provided the contractor submits a Self Assessment declaring them to HMRC;
the need to thoroughly check the umbrella company you work with: from April 2026, agencies and end clients will have a legal obligation to verify that the umbrella companies they use are fully HMRC compliant. This follows years of malpractice in the sector, with some umbrellas using complex structures or artificial arrangements to reduce tax liabilities. As a result, many umbrella companies may no longer meet compliance standards, making it essential for contractors to choose a trusted and transparent provider.
Jump is fully HMRC compliant and operates with a transparent, simple and secure model, offering contractors and clients complete peace of mind.
Good to know:
Umbrella company fees are usually fixed and paid weekly or monthly (around £25–£30 per week). However, some umbrella companies charge a percentage of your turnover instead.
How do I choose between the two based on my profile?
The choice between an umbrella company and a Limited company depends on your contracts, your goals in terms of tax optimisation, your tolerance for administrative work, and the level of social protection you’re looking for.
A Limited company is the best option if you want to maximise your tax efficiency and take-home pay. On the other hand, an umbrella company frees you from administrative constraints and provides full employee-style social protection.
| Profile | Best option | Explanation |
|---|---|---|
| Starting and testing a business quickly | Umbrella | No formalities, immediate start |
| Sole trader wanting to avoid VAT complexity | Umbrella | The umbrella company handles VAT |
| Contractor who wants to delegate admin tasks (no IR35 or HMRC accounting rules) | Umbrella | The umbrella handles everything |
| Recent graduate | Umbrella | Simple and low risk |
| Retiree | Umbrella | Can combine both options if needed |
| Contractor seeking maximum tax optimisation | Limited | Dividends + deductible expenses |
| Contractor looking for stronger employee protection or to build unemployment rights | Umbrella | Full employee status |
| Freelancer with a property purchase project | Umbrella | Continuous employment is valued by banks |
| Contractor with long-term, high day-rate contracts | Limited | More profitable |
| Freelancer with many business expenses | Limited | More extensive deductions |
Note:
It is possible to combine a Limited company with an umbrella company to benefit from both systems: one contract under your limited company for more attractive remuneration, and another through an umbrella company to avoid IR35 rules.
FAQ
Does IR35 apply to umbrella company employees?
No. When you work through an umbrella company, you are taxed under PAYE as an employee, so IR35 does not apply. The umbrella ensures full compliance, which removes the risk of being reclassified by HMRC.
What is the new legislation for umbrella companies?
The United Kingdom is tightening the rules governing umbrella companies. From 6 April 2026, end clients and recruitment agencies will be held jointly liable with umbrella companies for correctly accounting for PAYE income tax and National Insurance Contributions (NICs) for contractors working under an umbrella arrangement. However, the end client’s liability will only apply if no intermediary (such as a recruitment agency) is involved.
