Contractor vs Umbrella vs PAYE: IR35 Rules and Take-Home Pay Explained
By calculatemysalary.co.uk Editorial Team
Learn the differences between contractor, umbrella, and PAYE roles in the UK, how IR35 operates, and how each affects your take-home pay.
Three ways to work — and three very different payslips
Thinking about contracting? Already doing it and wondering if your set-up still makes sense? The choice between running a limited company, working through an umbrella, or staying in PAYE employment comes down to money, admin tolerance, and IR35 risk.
This guide compares all three models using 2025/26 tax rules, with worked take-home examples so you can see what actually lands in your bank account.
The take-home figures below are illustrative and based on 2025/26 UK tax rules. Your actual results will depend on your tax code, pension contributions, expenses, and individual circumstances. Tax rules change — always check current guidance or speak to a professional.
How each model works
Limited company contractor (outside IR35)
You set up your own limited company (a PSC — personal service company) and invoice clients directly. You're responsible for:
- Invoicing and chasing payment
- Paying yourself a mix of salary and dividends
- Filing company accounts and Self Assessment
- Making sure each contract is correctly assessed for IR35
Pros: Highest potential take-home pay, full control over your finances, and the ability to claim allowable business expenses.
Cons: More admin (or accountant fees), and you carry the IR35 compliance risk.
Umbrella company worker
An umbrella company sits between you and the end client. It handles your payroll through PAYE, deducts tax and National Insurance, and deals with compliance and insurance.
Pros: Simple set-up, minimal paperwork, and no need to worry about IR35 yourself because you're taxed as an employee.
Cons: Lower take-home pay than an equivalent outside-IR35 limited company role, weekly or monthly umbrella fees, and almost no scope for tax-deductible expenses.
PAYE employee
A regular full-time (or part-time) job with an employer.
Pros: Stable pay, employer pension contributions, employment rights, zero admin.
Cons: Lowest flexibility, standard PAYE deductions with limited tax-planning options beyond pensions and salary sacrifice.
IR35: the short version (2025/26)
IR35 (the off-payroll working rules) decides whether you're effectively an employee for a given contract. If you are — ignoring the intermediary — then the contract is inside IR35 and you're taxed broadly like an employee for that engagement.
What pushes a contract inside IR35?
HMRC looks at several factors and weighs them together. The big ones:
- Control — the client dictates how, when, and where you work
- Substitution — you have no genuine right to send someone else in your place
- Integration — you're embedded in the client's organisation (same hours, reporting lines, tools)
Other factors matter too: mutuality of obligation, financial risk, who provides the equipment, and more. No single factor decides it.
Who decides IR35 status?
- Public sector and medium/large private-sector clients must assess whether each contract is inside or outside IR35 and issue a Status Determination Statement.
- Small private-sector clients (Companies Act thresholds) leave the assessment to the contractor's own limited company.
What it means for your pay
- Outside IR35: You can structure pay through salary and dividends, claim allowable expenses, and keep more.
- Inside IR35: Tax is calculated at employee rates. The take-home advantage of a limited company largely disappears.
Take-home comparison: real numbers
These figures use 2025/26 tax rules and standard assumptions. Your numbers will vary.
Scenario 1: £400/day, 5 days a week (~£104,000/year)
| Work model | Approx. annual take-home | Notes |
|---|---|---|
| Contractor (outside IR35) | £70,000–£76,000 | Depends on expenses, dividend split, and accountant fees |
| Umbrella company | £58,000–£62,000 | Includes weekly umbrella fee (typically £12–£30) |
| PAYE employee (equivalent salary) | £52,000–£56,000 | PAYE deductions only; excludes employer pension match |
Scenario 2: £250/day, 3 days a week (~£39,000/year)
| Work model | Approx. annual take-home | Notes |
|---|---|---|
| Contractor (outside IR35) | £28,000–£31,000 | Part-time work can keep you in lower tax bands |
| Umbrella company | £23,500–£25,500 | Umbrella fees bite harder on lower earnings |
| PAYE employee (equivalent salary) | £21,500–£23,000 | May come with benefits that offset the lower take-home |
The gap narrows at lower day rates, partly because umbrella fees and accountant costs eat into a smaller pie.
Pros, cons, and risks of each model
Limited company (Ltd)
Advantages
- Highest earning potential
- Dividend tax treatment is more favourable than PAYE
- Flexible expense claims (allowable business costs)
- Full control over your finances
Risks
- IR35 investigations can lead to retrospective tax bills
- Accountant costs (typically £900–£2,000/year)
- No statutory employee rights (holiday pay, sick pay, redundancy)
Umbrella company
Advantages
- No admin burden — the umbrella runs payroll for you
- You're employed by the umbrella, so you should get statutory rights like holiday pay and sick pay (details vary by provider)
- Works well for inside-IR35 contracts
Risks
- Weekly or monthly fees (£12–£30 is typical)
- Holiday pay may be "rolled up" into your hourly rate rather than paid separately — check how your umbrella handles it
- No tax efficiency beyond standard PAYE
PAYE employment
Advantages
- Stable, predictable salary
- Employer pension contributions
- Full employment rights and protections
Risks
- Least flexibility
- Standard tax and NI deductions with limited planning options
- Earning potential is capped by your salary band and pay-review cycle
Which model suits you?
Ask yourself four questions:
1. Do you want flexibility over when and where you work?
- Yes → Limited company or umbrella
- No → PAYE employment
2. Can you realistically get contracts outside IR35?
- Yes → Limited company gives the best take-home
- No or unsure → Umbrella keeps things simple and compliant
3. How much admin are you willing to handle?
- Minimal → Umbrella company
- Happy to manage (or pay an accountant) → Limited company
4. Do you value employee benefits?
- Yes → PAYE or umbrella
- Not bothered → Limited company
Example: spotting an inside-IR35 contract
Picture a six-month IT contract at a large UK bank. The client sets your tasks and hours, you work on-site, and there's no option to send a substitute. That ticks the boxes for inside IR35 — meaning:
- A limited company structure probably won't give you the tax advantages you're hoping for
- An umbrella handles compliance and payroll under PAYE rules
- You'll be taxed broadly like an employee regardless
Use HMRC's Check Employment Status for Tax (CEST) tool to test your own contracts.
Costs to watch out for
Limited company
- Accountant: £900–£2,000/year
- Accounting software: £10–£40/month
- Professional indemnity insurance: varies by sector
Umbrella company
- Weekly fee: typically £12–£30
- Watch for extras: same-day payment charges, processing fees, insurance add-ons
- Check what's included before you sign up
PAYE employee
- No direct fees
- Pension auto-enrolment deductions apply
Making your decision
There's no universally "best" option. A contractor earning £600/day outside IR35 will keep significantly more than an equivalent umbrella worker — but if HMRC reclassifies that contract, the tax bill could wipe out years of savings. An umbrella gives you certainty at the cost of lower take-home. PAYE gives you stability and benefits but the least control.
Run your own numbers through the salary calculator, factor in the admin you're willing to do, and be honest about your IR35 risk. That's the combination that leads to the right answer for you.