Should I Be a Contractor in the UK? - A Friendly Guide for Anyone New to Contracting

When my friend Olivia received her UK settlement, the first thing she did… was quit her job. Not because it was bad. Actually, she had a great job:

• A stable monthly salary

• Private medical insurance paid by her employer

• Flexible working hours

• A wellbeing programme and training support

So why did she leave?

“I’ve had stability. Now I want options,” she said.

She wasn’t running away from something bad.She was ready to try something new—something that gave her more control over her time, her income, and her work life.

From Permanent Job to Contractor: Olivia’s Story

Olivia’s first step was trying umbrella contracting. Instead of becoming fully self-employed right away, she signed up with an umbrella company. It’s a kind of middleman. The umbrella company officially employs you, sends invoices to the client, handles your taxes, and pays you like a normal job—with a payslip. Some umbrella companies even offer access to benefits platforms, like retail discounts or optional healthcare schemes. But when she saw her first payslip, she paused.

“Why is it so small when my day rate sounds big?”

That’s when she realised:

• Umbrella companies deduct their fees

• You also pay both employee and employer National Insurance

• And take-home pay isn’t always as high as it seems on paper

Trying Something Bolder: Limited Company Contracting

A few months later, Olivia decided to set up her own limited company.

She became the director of her own business. She designed her own logo. She started choosing her own clients and setting her own hours.

This time, there was no umbrella company in the middle. She invoiced clients directly and had full control of her earnings and expenses.

But with that freedom came responsibility:

• No paid holidays or sick leave

• She had to chase unpaid invoices herself

• She needed an accountant

• She had to learn about IR35 and understand how to pay herself legally

It wasn’t easier—but she said it felt more like her.

So… What’s the Difference Between These Options?

If you’ve ever wondered what the real difference is between being a permanent employee, an umbrella contractor, or a limited company contractor in the UK — here’s a side-by-side comparison to help you see things clearly.

This isn’t about which one is better. It’s about understanding what each path actually offers, so you can make a choice that fits your goals, lifestyle, and comfort with risk.

Note: This table is for reference only. Please speak to an accountant or tax adviser before making any decisions about your work structure.

Feature	Full-Time Permanent Employee	Umbrella Contractor	Limited Company Contractor
Income Type	Monthly salary via PAYE	Hourly/daily rate (via PAYE payslip)	Invoiced hourly/daily rate via Ltd Co.
Tax & Admin	Employer manages PAYE, NI, tax according to your tax code	Umbrella handles PAYE and NI (you pay fees + both employee and employer NI)	You/your accountant manage tax, VAT, invoicing, and filings
Other Statutory Protections	Includes holiday, sick, maternity/paternity leave, redundancy protection	Partial – holiday pay often rolled into rate; other benefits vary by provider	None – you must budget for your own leave and protections
Pension	Auto-enrolment; employer contributions	Some offer pensions; auto-enrolment may apply	You must arrange personal or company pension
Flexibility	Low – fixed hours and duties	Medium – depends on contract and client	High – full control over projects, schedule, and workload
Other Benefits (e.g. healthcare)	Often included: private medical, enhanced sick leave, EAP	Optional access to umbrella perks platform (varies by provider)	Pay out-of-pocket for healthcare or benefits
Employment Rights	Full employment rights under UK law	Employee of umbrella company; limited rights	No employment rights; you are a company director
Control Over Work	Low – tasks typically assigned by employer	Medium – you negotiate with client but don’t have full control	High – you choose clients and negotiate terms
Risk Level	Low	Medium	High – includes admin, IR35, and cash flow risk
Take-Home Pay Potential	Stable but lower due to fixed salary	Moderate – affected by fees & umbrella NI	Highest if well-managed and outside IR35
IR35 Risk	Not applicable (you are an employee)	Usually assumed inside IR35 (handled by umbrella)	High – you must assess IR35 status per contract
Holiday Pay	Paid leave included in contract	Technically included – rolled up or accrued depending on provider	No entitlement – plan and save for time off
Sick Pay	Statutory or enhanced sick pay	Depends on umbrella policy	No entitlement unless privately insured
Invoicing & Payroll Responsibility	Employer runs payroll	You submit timesheets; umbrella processes payroll	You generate and send invoices; manage own payroll
Insurance Needs	Covered by employer	Usually covered by umbrella (check policy)	You must arrange and maintain business insurance (e.g. PI, liability)

Not Sure If Contracting Is Right for You?

Reading about the options is one thing — but knowing whether you’re ready is something else.

That’s why I created this quick self-assessment. It’s not a test—just a friendly tool to help you think about your current lifestyle, financial position, and career preferences. Take a few minutes to reflect, and give yourself a score from 1 to 5 for each of the statements below.

Rate each statement from 1 to 5.

1 = Strongly disagree, 5 = Strongly agree

Mindset & Lifestyle

1. I enjoy managing my own time and working independently

2. I’m okay with not being paid when I’m sick or on holiday

3. I feel confident making decisions without constant supervision

4. I can handle not knowing where my next project is coming from

5. I want more control over the kind of work I do

Financial Readiness

6. I have 3–6 months of living expenses saved

7. I understand how tax and National Insurance work in the UK

8. I can afford an accountant or manage basic bookkeeping

9. I can wait 30 days or more to be paid

10. I know that higher day rates often come with more responsibility

Skills & Industry Fit

11. My industry commonly uses contractors or freelancers

12. I have a skill that’s in demand

13. I’m confident applying for project-based work

14. I know people who’ve gone into contracting successfully

15. I’m comfortable reviewing or writing simple contracts

Scoring Guide (for reference only)

60–75: You may be ready to explore limited company contracting.

Now’s a good time to research and speak with an accountant.

40–59: You might be nearly ready.

Umbrella contracting could be a safer first step before setting up a business.

Below 40: Permanent work may suit you best right now.

But your situation may change—so keep learning and check back later.

Final Thoughts

This isn’t about which option is better. It’s about which one suits you—your lifestyle, your goals, and your comfort with risk.

Ask yourself:

• Do I want freedom or structure?

• Can I handle irregular income?

• Does my industry support contractors?

• Am I ready to run my own business life?

Olivia didn’t quit her job because she disliked it. She left because, after years of working hard and building her life in the UK, she had options. And she chose one that gave her more control.

Free Download

Want to keep this guide handy? Download the PDF checklist and questionnaire below.

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Want More Like This?

If this topic is useful to you, let me know!Would you like to learn more about:

• How to set up a limited company in the UK?

• What IR35 really means (in plain English)?

Please leave a comment. If enough people ask, I’ll turn this into a full mini-series.

Reference Sources:

HMRC. (2024). Working through an umbrella company. Available at: www.gov.uk/guidance/working-through-an-umbrella-company

GOV.UK. (2024). Employment status and your rights. Available at: www.gov.uk/employment-status

Disclaimer

The content in this blog is for general information purposes only. It is based on personal experience and publicly available knowledge about the UK employment market. This does not constitute professional advice in legal, tax, or financial matters. Contracting rules, tax obligations, and employment rights can vary depending on your personal situation, industry, and immigration status. Always consult a qualified accountant, tax adviser, or legal professional before deciding whether to become a contractor, open a limited company, or change your work status in the UK.