Choosing between contracting and employment is one of the most significant financial decisions a UK professional can make. The difference in take-home pay can be substantial — but so can the risks. This guide breaks down the real numbers for 2025.
The Three Contracting Structures
Most UK contractors operate through one of three structures. The right choice depends on your IR35 status, working patterns, and tax efficiency goals.
1. Personal Service Company (PSC / Ltd Company)
Operating through your own limited company is traditionally the most tax-efficient route for contractors outside IR35. You pay yourself a low salary (typically around £12,570 to avoid income tax, or £9,100 to optimise NI) and extract the rest as dividends, which are taxed at lower rates.
Example — £500/day contractor, 220 days/year = £110,000 gross revenue:
2. Umbrella Company
An umbrella company acts as your employer. Your client pays the umbrella, which deducts PAYE tax, National Insurance (both employee and employer), and an umbrella margin fee (typically £20–£30/week). You receive the remainder as net pay.
Example — £500/day via umbrella:
3. PAYE Employee
As a permanent employee on an equivalent salary of £75,000 (a reasonable equivalent to £500/day contracting including employer costs):
IR35: The Critical Variable
Since April 2021, for medium and large private sector clients, the IR35 determination responsibility shifted to the end client. If your contract is deemed "inside IR35", your Ltd company income is treated as employment income — wiping out most of the Ltd company tax advantage.
Inside IR35 via Ltd company typically results in similar (sometimes worse) take-home than an umbrella — but with additional administrative burden. Most contractors in this position use an umbrella company.
Beyond Tax: Other Factors
- Pension: Employees get employer pension contributions (minimum 3%). Contractors must fund their own.
- Holiday pay: Employees get 5.6 weeks paid holiday. Contractors don't bill when not working.
- Job security: Contracts can end with short notice. Employees have redundancy rights.
- Mortgages: Lenders often require 2 years of accounts for self-employed contractors.
- Benefits: No sick pay, no employer health insurance unless you arrange it yourself.
Which is Better for You?
Outside IR35 through a Ltd company typically offers the highest take-home — often 20–30% more than equivalent employment. But this comes with administrative responsibility (running a company, filing accounts, managing IR35 risk) and reduced employment protections.
For short engagements or inside-IR35 roles, an umbrella company removes the admin burden while still providing legitimate contracting flexibility. It's rarely as tax-efficient as outside-IR35 Ltd, but it's compliant and straightforward.