UK Contract Type Guide · 2026
Should I use PAYE, umbrella, or my own ltd company in the UK?
Definition
Three structures for receiving UK income: (1) PAYE — direct employee of the end client; (2) Umbrella — PAYE employee of an umbrella company providing service to end client; (3) Ltd Company — your own limited company contracts with end client; you take salary + dividends from the ltd.
Rights and protections
PAYE: full employee rights at end client (assuming employee status). UMBRELLA: full employee rights of the umbrella (not the end client) including holiday, SSP, pension. LTD: contractor manages own arrangements; ltd company can fund pension, expenses, business protection.
Employer obligations
PAYE: end client operates payroll. UMBRELLA: umbrella operates payroll; agency/end client pays umbrella. LTD: ltd company operates own payroll for the contractor (as director); end client pays ltd as B2B invoice.
Tax and pay implications
PAYE £100k gross → net ~£68k. UMBRELLA £100k gross → net ~£62k (extra deductions for umbrella margin + employer NI). LTD OUTSIDE IR35 £100k gross → net ~£78-82k via salary £12.5k + dividends. LTD INSIDE IR35 £100k gross → net ~£62-65k (PAYE-equivalent deductions, no advantage over umbrella). Difference is dramatic for outside-IR35 engagements only.
Common use cases
PAYE: permanent roles, simple. UMBRELLA: short inside-IR35 contracts, transitioning contractors, those without ltd. LTD: long-term outside-IR35 contracts, multiple clients, business expense efficiency, pension funding strategy.
Worked example
Aisha had a £100k/year contract opportunity. Inside IR35 (assessment locked in by client): umbrella net ~£62,000. Outside IR35 (different client, structured properly): ltd company net ~£80,000. PAYE permanent equivalent: ~£68,000. The structure decision was driven by IR35 status, not personal preference. For her chosen outside-IR35 engagement, ltd was the right choice — she funded pension £30k/year through the ltd (further tax efficiency), claimed legitimate business expenses (~£3k/year), and netted significantly more than alternatives.
Recruiter pro tip
The single most important question: 'Will this engagement be inside or outside IR35?' If outside, ltd company is almost always best. If inside, umbrella is fine for short-term and ltd loses its tax advantage. PAYE is best for genuine permanent roles where you want full employment rights. Most contractors over-rotate into ltd companies for inside-IR35 engagements where umbrella would be simpler with similar net. Match structure to engagement type.
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