Contractor vs Umbrella vs PAYE: IR35 Rules and Take-Home Pay Explained
Learn the differences between contractor, umbrella, and PAYE roles in the UK, how IR35 operates, and how each affects your take-home pay.
Contractor vs Umbrella vs PAYE (UK): IR35 Rules and Take-Home ComparisonbelongsToTheUrlIntroduction
Choosing between contract work, umbrella company, and PAYE employment is far from a straightforward task—especially after such upheavals in the IR35 regime, with amped compliance imposed on labor markets across the United Kingdom. Whether you are taking the first step towards flexible work or thinking of leaving your permanent job, knowing the actual take-home pay difference will be pivotal.
Herein this guide, we try to convey what each model entails, where IR35 is played, and how much you would end up getting in-hand after tax, National Insurance, and the fees. By looking at real take-home comparisons, you will be able to make the informed choice for your situation.
For a more custom tailored estimate, feel free to use our salary calculator tool at any time.
The examples and take-home pay ranges in this article are illustrative only and are based on the 2024/25 UK tax rules. Your actual results will vary depending on your tax code, pension contributions, expenses, and individual circumstances. Tax rules can change, so always check up-to-date guidance or speak to a professional.
Contractor vs Umbrella vs PAYE: The Key Differences and Comparisons
First let us lay out how each model functions before going into discussion about IR35 consequences and tax.
Limited Company Contractor (Outside IR35)
You contract through your own limited company (PSC).
Your duties are to:
- Invoicing clients
- Paying yourself through a mix of salary and dividends
- Completing Self Assessment and filing company accounts
- Making sure each contract is assessed correctly for IR35 and that you stay compliant
Pros: Higher potential take-home pay, complete control, and the ability to claim allowable business expenses
Cons: More admin to organise (or pay an accountant for), and exposure to IR35 compliance risk
Umbrella Company Worker
As an Umbrella Employee, the provider gives you a service.
The umbrella trades as follows:
- Processing payroll (PAYE)
- Deducting tax and National Insurance (NI)
- Making it compliant and insured
Pros: Easy set-up, minimal paperwork, and no need to manage IR35 yourself because you are taxed via PAYE
Cons: Lower take-home pay compared with an equivalent outside‑IR35 limited company role, weekly umbrella charges, and very limited scope for tax‑deductible expenses
PAYE Employee
You do a regular full-time job with an employer.
Pros: Stability in payment, job perks, no admin
Cons: The most restrictive, standard PAYE deductions
IR35 Synopsis (Year 2024/25 Tax Year)
IR35 (also called the off‑payroll working rules) is a tax law designed to work out whether, for a given engagement, you are effectively working like an employee. If, ignoring the intermediary (your limited company), you would be an employee of the client, then the contract is treated as inside IR35 and you are taxed broadly like an employee for that work.
When IR35 Comes into Play
IR35 can come into play when you:
- The client exercises a high degree of control over how, when, and where you work
- You do not have a genuine, practical right to send a suitably qualified substitute in your place
- You are closely integrated into the customer's organisation, similar to an employee (same hours, reporting lines, tools, etc.)
In practice HMRC look at a wider list of factors (including mutuality of obligation, financial risk, provision of equipment and more) and weigh them together, rather than any single point deciding things.
- Who decides IR35 status?
- In the public sector, and for medium or large private‑sector clients, the client must decide whether a contract is inside or outside IR35 and issue a Status Determination Statement.
- For small private‑sector clients (as defined by Companies Act thresholds), the contractor’s own limited company is responsible for assessing IR35 and accounting for the correct tax.
Contractor Take-Home Calculation
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Outside IR35: Possible to increase take-home by way of dividends and allowable expenses.
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Inside IR35: Taxes are calculated at the rates of employees, with little scope for your take-home.
PAYE and Dividends; Comparative Data for Income
Provisos that use assumptions drawn from the tax rules of 2024/25.
Illustration 1: £400 a day, working five days per week (circa £104,000 a year)
| Work Model | Approximate Annual Take-Home | Remarks |
|---|---|---|
| Contractor (Outside IR35) | £70,000–£76,000 | Depending on expenses, dividend strategy and accountant fees. |
| Umbrella Company | £58,000–£62,000 | Includes weekly umbrella fee (£12–£30) |
| PAYE Employee (Equivalent salary) | £52,000–£56,000 | Includes employee NI and PAYE; excludes pension match |
Scenario 2: £250 per day, 3 days per week (appr.£ 39,000 per year)
| Working Model | Approx. Annual Take-Home | Notes |
|---|---|---|
| Contractor (Outside IR35) | £28,000–£31,000 | Flexibility reduces risk of permanent tax bands |
| Umbrella Company | £23,500–£25,500 | Part-time workers are likely to be affected by fees |
| PAYE Employee (Equivalent salary) | £21,500–£23,000 | May have benefits that offset the lower take-home pay |
Pros, Cons & Risks of Each Model
Contractor (Ltd Company)
Advantages
- Highest earning potential
- Dividend tax relief is very valuable
- Flexible expense claims
- Total control over all aspects of the financials
Risks/Considerations
- IR35 risk and the risk of a retrospective tax hike
- Cost of an accountant
- Limited employee entitlements
Umbrella Company
Advantages
- No administration
- You are usually employed by the umbrella and should receive statutory employment rights such as holiday pay and sick pay (details vary by provider)
- This works well for inside-IR35 roles
Risks/Considerations
- Possibility of charges weekly or monthly
- Holiday pay may be paid as “rolled‑up” or handled in different ways, so it is important to understand how your umbrella structures it
- No tax-efficiency beyond standard PAYE
PAYE Employment
Advantages
- Stable salary
- Employer pension contributions
- Benefits and protections
Risks/Considerations
- Least flexibility
- A standard amount of tax and National Insurance is deducted at source, with limited scope for tax planning beyond things like pensions
- Earnings potential is typically capped by your salary band and pay review process
What Is the Best Option for You to Choose?
The following are some practical questions to aid in your final decision:
1. What maximum flexibility do you desire?
- Yes: Limited Company or Umbrella
- No: PAYE Employment
2. Are they likely to have contracts which are outside IR35?
- Yes: For most take-home pay, they should preferably use the limited company
- No/Unsure: Umbrella offers protection and simplicity
3. How much involvement are you prepared to administer?
- Less: Umbrella company is a good option
- More: Limited company
4. Do you want employee benefits?
- Yes: PAYE or umbrella company
- No: Limited company has no objection
Example: Calculating IR35 Risk Under a sample Contract
To paint a picture of what the IR35 situation might mean, think about the following six-month IT contract with one of the big UK banks:
- The client controls the tasks and hours.
- The contractor on site
- There can be no replacing the contractor by another worker
Chances are that this is an IR35 case-meaning:
- A Limited company may not be appropriate
Compliance and insurance under a vendor company are offered
Payroll deductions are processed based on PAYE rules
To evaluate your employment status, use the Check Employment Status for Tax (CEST) tool on the GOV. UK website.
Fees and Costs to Watch Out For
Contractor (Ltd)
- Account: Target cost is £900–£2,000 annually
- Software
- Professional Indemnity Insurance
Umbrella Company
- Fees on a weekly basis, although an estimated amount between £12-£30
- Some extra add-ons, albeit infrequent:
- Same-day payment
- Processing fees
- Insurance add-ons
PAYE Employee
- There is no direct fee
- Auto deductibles for pension contributions
Conclusion
An enumeration of contracting, umbrella work, or PAYE employment under the envelope would be spurred by one's account of the takeaway from her implementations in any of these three. While contractors may work an inducement structure to improve their take-home pay — only outside IR35 — the umbrella company provides almost a half-way house compliant to engage its workers with PAYE as the means of steady employment with benefits.
Either way, understanding your tax position is crucial, along with understanding how this impacts your take-home pay. So use the insights above for your consideration, run your figures through the calculators and see what suits you the best based on your own circumstances.