If you've been offered a UK contract role, one of the first questions you'll hit is how you actually get paid. Recruiters typically offer three routes: PAYE through the agency, an umbrella company, or your own limited company. Each one produces a different take-home figure from the same day rate — and from April 2026, new rules change how the risk is shared between contractors, umbrella companies and the recruitment agencies that place them. Here's how the three options actually compare in 2026/27.

The Three Ways UK Contractors Get Paid

All three routes start from the same "assignment rate" (the day or hourly rate agreed with the client), but they tax it differently:

  • Agency PAYE — the recruitment agency employs you directly and runs payroll, deducting Income Tax and National Insurance (NI) at source, exactly like a permanent job.
  • Umbrella company — a third-party umbrella firm employs you, invoices the agency for your assignment rate, deducts its own margin, then runs PAYE on what's left.
  • Limited company (PSC) — you own and run your own company, invoice the agency or client, and pay yourself a mix of salary and dividends, subject to your IR35 status.

Which route is even available to you often depends on the client's IR35 assessment for the role, not just personal preference — many public sector and large private-sector contracts are now assessed as "inside IR35," which narrows your options to umbrella or agency PAYE.

Umbrella Company Pay: Where the Margin Goes

An umbrella company's invoice to the agency covers your assignment rate plus employer costs (employer NI, the Apprenticeship Levy, and holiday pay accrual), and the umbrella deducts its own fee before running PAYE. Typical umbrella margins in 2026 run to roughly £15–£30 a week, or £60–£130 a month, on top of the standard employment deductions. Because employer NI and the Apprenticeship Levy come out of the assignment rate before you're taxed personally, umbrella pay is usually noticeably lower than the headline day rate suggests — a common surprise for contractors moving from a permanent salary or from limited company contracting.

GOV.UK provides a free tool to estimate umbrella take-home pay for the current tax year, and HMRC has published detailed guidance on what a compliant umbrella payslip should show, which is worth checking before accepting an assignment. Source: GOV.UK, "Work out pay from an umbrella company," HM Revenue & Customs, last updated 6 April 2026.

Limited Company Contracting: Higher Take-Home, More Admin

If your contract is assessed as outside IR35, running your own limited company is usually the most tax-efficient option. The typical structure is a small salary (often around the secondary NI threshold, roughly £9,100 a year) plus dividends from company profits after 19% Corporation Tax. On this basis, contractors outside IR35 have generally kept somewhere in the region of 65–72% of gross contract income after all taxes — noticeably more than the equivalent umbrella or PAYE route.

That gap is narrowing, though. From April 2026, dividend tax rates rose by 2 percentage points: the ordinary rate moved from 8.75% to 10.75% and the higher rate from 33.75% to 35.75% (the additional rate stays at 39.35%). The tax-free dividend allowance remains £500 a year. Source: HM Treasury/GOV.UK, "Changes to tax rates for property, savings & dividend income," published 26 November 2025. The limited company route still tends to come out ahead of umbrella or PAYE for outside-IR35 work, but the margin is smaller than it was a couple of years ago, and it comes with real admin: company accounts, a Corporation Tax return, and typically an accountant's fee.

If your role is assessed as inside IR35, this advantage mostly disappears — you'll be taxed on your invoiced income much like an employee, which is why many inside-IR35 contractors choose umbrella employment instead of running a limited company purely to avoid the extra admin for little tax benefit.

Agency PAYE: Simplest, But Usually the Lowest Take-Home for Contract Work

Being paid directly by the agency under PAYE is the simplest option — no umbrella margin, no company admin, and you're treated as an employee with statutory rights like holiday pay and pension auto-enrolment built in. The trade-off is that, unlike a permanent role, contract day rates on PAYE terms are often calculated to already reflect the fact you won't get client-side benefits, so take-home pay per day worked is typically the lowest of the three routes once you account for the lack of margin negotiation an umbrella or limited company structure can offer.

What Changes From April 2026

The most significant shift for 2026 isn't a tax rate — it's who's on the hook if something goes wrong. From 6 April 2026, new legislation makes recruitment agencies (and in some cases end clients) jointly and severally liable for PAYE Income Tax and NI that an umbrella company fails to account for correctly. In practice, this means agencies are now expected to carry out much stricter due diligence on the umbrella companies they work with, and contractors should expect to see more questions about which umbrella they're using, along with clearer payslips. Source: GOV.UK, "Work out pay from an umbrella company" and associated HMRC guidance on PAYE rules for labour supply chains, updated 6 April 2026. HM Treasury has stated it expects the change to recover around £895 million in previously unpaid tax during the 2026/27 financial year by tackling non-compliant umbrella arrangements.

Which Should You Choose?

There's no single right answer — it depends on your IR35 status, how many assignments you plan to take, and how much admin you're willing to take on:

  • If your role is outside IR35 and you plan to contract for more than a few months, a limited company is usually still the most tax-efficient choice, even after the April 2026 dividend tax rise.
  • If your role is inside IR35, or you're contracting short-term, an umbrella company gives you continuous employment status (useful for mortgages and references) without the ongoing admin of a limited company.
  • If you want the absolute minimum admin and don't mind the lowest take-home, agency PAYE is the simplest route.

Before signing an umbrella agreement, always ask for a full breakdown of the assignment rate versus your gross pay so you can see exactly where the margin and employer costs go, and check the umbrella appears on your recruitment agency's approved list — a direct result of the stricter due diligence agencies now have to carry out under the April 2026 rules.

For a broader look at what you should be taking home after tax in 2026/27, see our UK Salary Calculator 2026/27 guide.