Umbrella Company or Your Own Limited Company?

“Sorry, the agency only pays through an umbrella.” If you contract in Kent, you have probably heard some version of that line — and wondered whether it is actually true, and what it is quietly costing you. Umbrella companies and your own limited company are two very different ways to get paid, and the right one depends on the work in front of you. This post lays out the trade-offs and, most importantly, the number contractors most often get caught out by.

What each one actually is

An umbrella company employs you. You become its employee, it receives the assignment rate from the agency or client, runs you through PAYE, and pays you a salary after deductions. You get employment rights — holiday pay, statutory sick pay, a pension — and almost no admin. You do not run a company.

Your own limited company (a personal service company) is a business you own and direct. It invoices the client, pays corporation tax on its profits, and you extract money as a salary-and-dividend mix. More control, more efficiency when the work qualifies — and more responsibility.

When an umbrella is genuinely the right answer

Umbrellas are not a con. For plenty of contractors they are the sensible choice:

• Inside-IR35 engagements. If the contract is inside IR35, most of the limited-company tax advantage disappears anyway, and an umbrella spares you the admin of running a company for little benefit.
• Clients or agencies who will not engage a limited company. Some simply will not, as a matter of policy. An umbrella is then the practical route onto the assignment.
• Short or one-off engagements. If you are contracting briefly between permanent roles, the cost and effort of forming and closing a company rarely pays off.
• You value simplicity. No accounts, no VAT, no annual filings — some contractors happily trade a little take-home for a quiet life.

When your own company is better — and the admin that comes with it

For genuinely outside-IR35 work of any duration, your own company is usually more efficient and gives you far more control: over how you are paid, when you draw money, what you claim, and how you plan around the tax year. The trade-off is real responsibility — annual accounts and a corporation tax return, payroll, possibly VAT, confirmation statements at Companies House, director duties and the new director identity verification requirement. None of it is onerous with an accountant handling it, but it is not nothing, and it is the reason a company rarely makes sense for a two-week job.

The assignment rate trap — read this bit twice

This is the single thing contractors are most often caught out by, and the real reason this post exists. When an agency quotes you an assignment rate (sometimes called the umbrella rate or contract rate), that figure is not your gross pay. It is the amount the umbrella receives — and out of it the umbrella must first cover the employment costs that an employer normally pays on top of a salary: employer’s National Insurance, the Apprenticeship Levy, holiday pay and the umbrella’s own margin. Only what is left becomes your gross salary, which is then taxed through PAYE.

That is why an assignment rate and a limited-company day rate at the same headline number are not remotely the same thing. A worked example makes it obvious.

Worked example — £350 a day, quoted two different ways.

Take a five-day week, so roughly £1,750 a week gross to compare like with like.

As a £350/day assignment rate through an umbrella: before you are paid a penny of salary, that £1,750 has to absorb the umbrella’s margin (say £25 a week), employer’s NIC at 15% on the pay above the £5,000-a-year secondary threshold, the Apprenticeship Levy, and holiday pay. Those deductions typically swallow somewhere around 14–18% of the assignment rate before your own income tax and employee NIC are even applied. Your actual gross salary is materially below £1,750 — and that is what gets taxed.

As a £350/day limited-company rate on outside-IR35 work: your company invoices £1,750, pays corporation tax on the profit after your salary and legitimate expenses, and you extract the rest as a salary-and-dividend mix. There is no employer’s NIC being skimmed off a rate that was quoted to you as if it were pay.

The lesson is not “umbrellas are bad” — it is that you must compare the right numbers. If an agency offers you an assignment rate, always ask what it equates to as a limited-company day rate before you judge whether it is a good deal. We are very happy to run that comparison on your actual figures.

What a compliant umbrella looks like — and the warning signs

A compliant umbrella runs everything through PAYE, gives you a clear payslip showing the assignment rate, the employment costs deducted and your taxable salary, and pays you the full amount after ordinary tax and NIC. Look out for these red flags:

• Take-home that looks too good. Promises of 80–90% retention almost always mean a tax-avoidance scheme, not efficiency. If it sounds too good to be true, it is — and HMRC pursues the worker, not just the scheme.
• Payments split into a “salary” plus a “loan”, “advance”, “grant” or anything routed offshore. These are the hallmarks of disguised remuneration. Walk away.
• Opaque payslips that will not show you exactly what has been deducted and why.
• Pressure to sign quickly without seeing the numbers in writing.

An important change from April 2026

From 6 April 2026 the rules tightened to stamp out non-compliant umbrellas that pocket PAYE deductions instead of paying them to HMRC. Responsibility for making sure PAYE is correctly operated on umbrella payments now sits jointly with the recruitment agency that supplies you (or, where there is no UK-based agency in the chain, with the end client). In practice this pushes agencies and clients to use umbrellas they trust, which is good news for contractors — but it does not remove your own interest in checking that whoever pays you is genuinely compliant. Please treat the detail here as a summary and check the current position before relying on it.

It is not a once-and-for-all decision

Contractors switch between the two all the time, and there is nothing wrong with that. You might run your own company for outside-IR35 project work and drop into an umbrella for a short inside-IR35 engagement, then pick the company back up afterwards. The company can sit dormant in between. The right structure is the one that fits the contract in front of you — which is exactly why it pays to reassess each time.

How MCC Partners can help

We help contractors across Gravesend and the wider Kent area work out which route fits each engagement, translate an assignment rate into a genuine like-for-like comparison, and set up and run a limited company properly when that is the better answer. If an agency has told you it is umbrella or nothing, we can tell you quickly whether that stacks up for you.

Not sure whether your contract is even inside or outside IR35 in the first place? Start with our guide to how IR35 actually works, then see how to pay yourself as a director in 2026/27 if you go the limited-company route.

Figures and tax rules are correct as at the date of writing (October 2026) and reflect the 2026/27 tax year. Tax rules change — and with a new Chancellor and an Autumn Budget expected, some may change again. Please check the current position or speak to us before acting on anything in this article.