Why does the limited company route win on the numbers?

Three reasons. First, a Ltd lets you split income between salary (taxed via PAYE) and dividends (taxed at lower dividend rates). Second, paying yourself a £12,570 salary uses your full personal allowance with zero income tax and zero employee NI. Third, dividends don't attract Class 1 NI at all, you only pay dividend tax (10.75% / 35.75% / 39.35%) which is lower than the equivalent salary tax + NI. The Ltd also pays corporation tax on its profit, but at 19% small-profits rate (or 26.5% effective in the marginal band) which is still below the combined PAYE + NI hit on a salary of equivalent gross.

When does umbrella win in practice, despite Ltd winning on numbers?

When you factor in things this calculator doesn't quantify. (1) IR35 risk: if HMRC determines your contract was actually inside IR35, you owe the back tax plus penalties, a £30k+ problem. Umbrella eliminates that risk entirely. (2) Admin time: running a Ltd takes 1–3 hours/month plus an annual self-assessment, call it 30 hours/year. If your time is worth £50/hour, that's £1,500 of opportunity cost. (3) Insurance: contractor PII / IR35 insurance runs £200–£500/year for a Ltd; umbrella includes it. (4) Pension: through an umbrella you can salary-sacrifice into pension and capture both employee AND employer NI savings, Ltd pension via the company doesn't always match this efficiency. (5) Variable income: short contracts (< 6 months) or gaps between contracts are easier through umbrella.

Why does the calculator say Ltd wins at every day rate I try?

Because v1 only models the maths, not the qualitative factors (admin time, IR35 risk, insurance). With 2026/27 rates and £1,200 accountancy fees, the Ltd advantage is around £3,000–£4,000/year at typical day rates and shrinks above £700/day (where additional-rate dividend tax catches up). Older guidance often said umbrella wins at low day rates because of (a) higher historic accountancy fees and (b) the now-eliminated 9% Class 4 NI on Ltd directors. Modern reality: Ltd wins on numbers, but the trade-offs may push you toward umbrella anyway.

What if my contract is genuinely inside IR35? Can I still use Ltd?

Technically yes, via a Ltd company with a deemed-payment calculation, but this is almost always worse than umbrella. The deemed-payment route forces the Ltd to treat the income as employment income (full PAYE + NI), so you lose the dividend advantage entirely. You also still have all the Ltd admin overhead. For inside-IR35 work, umbrella is the standard answer.

What director salary should I pay myself?

£12,570 (the personal allowance) is the most common choice in 2026/27. At that level you pay £0 income tax and £0 employee NI on the salary, but the company saves about £2,388 of corporation tax (£12,570 × 19%) for paying it. The company pays £1,135.50 of employer NI on the salary (15% above the £5,000 secondary threshold), so the net company saving is £1,253. If you have other employees you may qualify for Employment Allowance, which removes the ER NI cost entirely, but single-director Ltds with no other staff DON'T qualify (per the 2016 rule).

Does this account for VAT?

We assume the day rate you enter is your VAT-exclusive amount (i.e., what flows into the company net of VAT). If you're on the Flat Rate Scheme, see the dedicated VAT FRS calculator (coming in Phase 6), for typical IT contractors at 14.5% sector rate, FRS adds about 1–2% to retention vs standard VAT.

Both routes have tax-efficient pension options, they just look different. Through an umbrella, salary sacrifice captures both your employee NI saving AND the umbrella's employer NI saving (because the umbrella's pay-bill cost is fixed). Through a Ltd, the company can pay pension contributions directly as an employer expense, getting CT relief at 19–25%. For most contractors at typical day rates, umbrella SS pension is the more efficient single mechanism. We'll add explicit pension comparison to this calculator in Phase 3.5.

Scottish residents pay Scottish income tax on their salary (six bands at 19/20/21/42/45/48%) but Westminster dividend rates on their dividends (10.75/35.75/39.35%). At the optimal £12,570 director salary, the Scottish vs rUK income tax is irrelevant (taxable salary = £0 in either case). The umbrella side is more affected, Scottish higher-rate workers pay more income tax on their gross taxable salary. Net: the Ltd advantage is slightly larger in Scotland for higher-rate contractors.

Calculator + comparison

Umbrella vs Limited Company: Calculator + Comparison

The same day rate, two routes, see exactly how much more (or less) you keep through each. Accurate to the penny for 2026/27, including corporation tax marginal relief and the full umbrella deduction chain.

Reviewed 27 April 2026 · 2026/27 rates verified

At £500/day × 220 days

Limited company wins by £3,610 a year

Ltd nets £69,129 (62.8% of revenue). Umbrella nets £65,519 (59.6% of the assignment).

Umbrella (inside IR35)

£65,519

£5,460/month · 59.6% retained

Show umbrella breakdown

Assignment	£110,000.00
Umbrella margin	−£1,300.00
Employer NI	−£13,464.29
Apprenticeship Levy	−£473.81
Income tax	−£25,336.76
Employee NI	−£3,905.84
Net	£65,519.30

Limited company (outside IR35)

£69,129

£5,761/month · 62.8% retained

Show Ltd breakdown

Revenue	£110,000.00
Director salary	−£12,570.00
Employer NI on salary	−£1,135.50
Accountancy fees	−£1,200.00
Other expenses	−£500.00
Pre-tax profit	£94,594.50
Corporation taxEffective 22.5%	−£21,317.54
Distributable as dividends	£73,276.96
Income tax on salary	−£0.00
Employee NI on salary	−£0.00
Dividend tax	−£16,717.76
Net (salary + dividends after tax)	£69,129.20

How the comparison works

Umbrella side

The agency pays the umbrella the day rate. Out of that, the umbrella covers their margin (£15–£30/week), employer NI (15% above £5,000), and the apprenticeship levy (0.5% pass-through). What's left is your gross taxable salary, which then runs through normal PAYE: personal allowance, income tax bands, employee Class 1 NI, student loan, pension (if salary-sacrificed). Inside-IR35 contractors use this route by default.

Limited company side

The company invoices the agency directly. From the revenue, the company pays you a director salary (£12,570 is standard, using the full personal allowance), the employer NI on that salary (£1,135.50 at the £12,570 level), accountancy fees (typically £1,200/year), and any other deductible business expenses. What's left is pre-tax profit, which pays corporation tax (19% small-profits rate, 25% main rate, with marginal relief in between).

After-CT profit gets distributed as dividends. The director then pays personal tax on the combined salary + dividends: zero income tax + zero employee NI on the salary (since it's exactly at the personal allowance), plus dividend tax on the dividends (10.75% basic / 35.75% higher / 39.35% additional after the £500 dividend allowance).

Worked example: £500/day, 220 days

Umbrella: £110,000 assignment − £1,300 margin − £13,464 employer NI − £474 apprenticeship levy → £94,762 gross taxable. PAYE: £25,337 income tax + £3,906 NI. Net: ~£65,519.

Limited: £110,000 revenue − £12,570 salary − £1,135 ER NI − £1,200 accountancy − £500 other → £94,594 pre-tax profit. CT: £21,318. Distributable as dividends: £73,277. Personal tax: £16,718 dividend tax (no income tax or NI on the salary at PA level). Net: ~£69,129.

Ltd advantage at £500/day: ~£3,610/year.

When the gap closes

The Ltd advantage isn't a flat percentage, it varies with day rate. Three regions worth knowing:

Below £200/day: Ltd still wins on raw numbers, but the gap is small (often £500–£1,500/year). At those rates, the £1,200 accountancy fee is a meaningful chunk of revenue, and the maths advantages of dividend splitting are smaller in absolute terms. Most people pick umbrella here purely for simplicity.
£300–£600/day:Ltd's sweet spot. You're into the corporation tax marginal-relief band but the dividend tax stays in basic + higher rates. Ltd advantage of £3,000–£5,000/year is typical.
Above £700/day: Ltd advantage shrinks. Total income pushes you over £125,140 (PA fully tapered) and into additional-rate dividend tax (39.35%). Combined with corporation tax at the marginal-relief upper-end effective rate (~25–26.5%), the gap can close to under £3,000/year. Umbrella still loses but not by much.

And remember: the calculator only models the raw maths. The qualitative trade-offs (IR35 risk, admin time, insurance costs, pension efficiency) can flip the answer either way depending on your circumstances.

What this calculator doesn't cover

Pension on either side: both routes have efficient pension options that we'll add in Phase 3.5.
VAT Flat Rate Scheme: for IT contractors at the 14.5% sector rate, FRS adds about 1–2% to retention. Coming as a separate calculator.
IR35 risk cost: Ltd outside-IR35 carries an investigation-and-back-tax risk. Real cost: £200–£500/year for IR35 insurance (Kingsbridge, Qdos), plus non-insurable risk if your contract reads as inside.
Ltd admin time: running a Ltd takes 1–3 hours/month plus annual self-assessment.
Retained earnings strategies: leaving profit in the Ltd to defer dividend tax to a later year. v1 assumes max-dividend distribution.
Employment Allowance: single-director Ltds with no other employees DON'T qualify (per 2016 rule). If you have other staff you do; we don't model that yet.
Mid-year switches: the calculator assumes you're on one route for the full year.

Frequently asked questions

Why does the limited company route win on the numbers?: Three reasons. First, a Ltd lets you split income between salary (taxed via PAYE) and dividends (taxed at lower dividend rates). Second, paying yourself a £12,570 salary uses your full personal allowance with zero income tax and zero employee NI. Third, dividends don't attract Class 1 NI at all, you only pay dividend tax (10.75% / 35.75% / 39.35%) which is lower than the equivalent salary tax + NI. The Ltd also pays corporation tax on its profit, but at 19% small-profits rate (or 26.5% effective in the marginal band) which is still below the combined PAYE + NI hit on a salary of equivalent gross.
When does umbrella win in practice, despite Ltd winning on numbers?: When you factor in things this calculator doesn't quantify. (1) IR35 risk: if HMRC determines your contract was actually inside IR35, you owe the back tax plus penalties, a £30k+ problem. Umbrella eliminates that risk entirely. (2) Admin time: running a Ltd takes 1–3 hours/month plus an annual self-assessment, call it 30 hours/year. If your time is worth £50/hour, that's £1,500 of opportunity cost. (3) Insurance: contractor PII / IR35 insurance runs £200–£500/year for a Ltd; umbrella includes it. (4) Pension: through an umbrella you can salary-sacrifice into pension and capture both employee AND employer NI savings, Ltd pension via the company doesn't always match this efficiency. (5) Variable income: short contracts (< 6 months) or gaps between contracts are easier through umbrella.
Why does the calculator say Ltd wins at every day rate I try?: Because v1 only models the maths, not the qualitative factors (admin time, IR35 risk, insurance). With 2026/27 rates and £1,200 accountancy fees, the Ltd advantage is around £3,000–£4,000/year at typical day rates and shrinks above £700/day (where additional-rate dividend tax catches up). Older guidance often said umbrella wins at low day rates because of (a) higher historic accountancy fees and (b) the now-eliminated 9% Class 4 NI on Ltd directors. Modern reality: Ltd wins on numbers, but the trade-offs may push you toward umbrella anyway.
What if my contract is genuinely inside IR35? Can I still use Ltd?: Technically yes, via a Ltd company with a deemed-payment calculation, but this is almost always worse than umbrella. The deemed-payment route forces the Ltd to treat the income as employment income (full PAYE + NI), so you lose the dividend advantage entirely. You also still have all the Ltd admin overhead. For inside-IR35 work, umbrella is the standard answer.
What director salary should I pay myself?: £12,570 (the personal allowance) is the most common choice in 2026/27. At that level you pay £0 income tax and £0 employee NI on the salary, but the company saves about £2,388 of corporation tax (£12,570 × 19%) for paying it. The company pays £1,135.50 of employer NI on the salary (15% above the £5,000 secondary threshold), so the net company saving is £1,253. If you have other employees you may qualify for Employment Allowance, which removes the ER NI cost entirely, but single-director Ltds with no other staff DON'T qualify (per the 2016 rule).
Does this account for VAT?: We assume the day rate you enter is your VAT-exclusive amount (i.e., what flows into the company net of VAT). If you're on the Flat Rate Scheme, see the dedicated VAT FRS calculator (coming in Phase 6), for typical IT contractors at 14.5% sector rate, FRS adds about 1–2% to retention vs standard VAT.
What about pension?: Both routes have tax-efficient pension options, they just look different. Through an umbrella, salary sacrifice captures both your employee NI saving AND the umbrella's employer NI saving (because the umbrella's pay-bill cost is fixed). Through a Ltd, the company can pay pension contributions directly as an employer expense, getting CT relief at 19–25%. For most contractors at typical day rates, umbrella SS pension is the more efficient single mechanism. We'll add explicit pension comparison to this calculator in Phase 3.5.
What about Scotland?: Scottish residents pay Scottish income tax on their salary (six bands at 19/20/21/42/45/48%) but Westminster dividend rates on their dividends (10.75/35.75/39.35%). At the optimal £12,570 director salary, the Scottish vs rUK income tax is irrelevant (taxable salary = £0 in either case). The umbrella side is more affected, Scottish higher-rate workers pay more income tax on their gross taxable salary. Net: the Ltd advantage is slightly larger in Scotland for higher-rate contractors.

Related calculators

Take-home pay (PAYE)

The deduction chain on a regular salary.

Inside IR35 (umbrella)

Detailed umbrella-only breakdown with pension SS option.

Outside IR35 (Ltd)

Detailed Ltd-only breakdown with salary-strategy comparison.

Related guides

Umbrella margin explained

The £15–£35/week fee structure, FCSA disclosure rules, and 5 questions to ask before signing.

Setting up a limited company

Step-by-step from registration to first invoice.

Inside vs outside IR35

The qualitative tradeoffs the calculator doesn't quantify.

Reviewed: 27 April 2026 · See how we calculate · not financial advice.