Question one: what structure?
Most freelancers should start — and many should stay — as sole traders: registration is free, admin is light, losses offset other income, and at typical freelance profits the tax difference versus a company is modest. A limited company earns its extra admin when profits are consistently strong (roughly £50k+), when you can retain profit in the business, when clients demand a company, or when liability genuinely worries you.
The special case is contracting through agencies or large clients — where the question stops being purely yours to answer, because IR35 rules put your employment status partly in the client's hands. That's where the trenchcoat comes off.
The full guide runs the structure numbers, explains IR35 without the folklore, and shows what a day rate really nets under each arrangement.
Question two: IR35, minus the folklore
IR35 (the off-payroll working rules) asks one thing: if the intermediary — your company — weren't there, would this engagement look like employment? Regular hours, your manager's direction, no right to send a substitute, mutual expectation of ongoing work: that pattern says "employee", and the rules tax it like employment.
- Who decides: for medium/large clients, they determine your status and give you a Status Determination Statement. For genuinely small clients, the decision (and risk) stays with you and your company.
- Inside IR35 means PAYE-equivalent tax on that contract — usually via the client/agency payroll or an umbrella. The company structure gives you little tax benefit on inside work.
- Outside IR35 means you're genuinely in business on your own account — company taxation applies as normal.
- What actually supports "outside": a real right of substitution, control over how/when you work, project-based deliverables, multiple concurrent clients, your own kit and insurance, and working practices that match the contract. Paper claiming one thing while reality shows another decides against you.
Practical rule If all your work is inside IR35, a limited company is mostly cost and admin — sole trader status usually isn't available for agency contracting, so an umbrella plus first-rate personal tax care is often honest and optimal. Mixed or outside work: the company earns its keep. This is exactly the review in our
Portfolio package.
Question three: what does the rate really pay?
£400/day × 220 worked days ≈ £88,000 billed. What lands in your pocket:
- Sole trader: after expenses (say £6k), tax and NI on £82k profit ≈ £26k → nets roughly £56k.
- Limited company, outside IR35: optimal salary/dividends on the same numbers typically nets £1–3k more if extracting everything — more if you retain profit or pension heavily (company pension contributions are the quiet superpower: deductible, NI-free).
- Inside IR35 / umbrella: employment taxes plus the umbrella margin bite hardest — nets meaningfully less on the same headline rate. When comparing an inside-IR35 offer to an outside one, discount the inside rate ~20–25% to compare fairly.
(Rounded illustrations at 2026/27 rates — your expenses, pension and other income move every line. We'll run your real numbers.)
Umbrella companies, honestly
A decent umbrella is fine: legitimate, simple, right for inside-IR35 stints. Check the margin (typically £15–30/week), confirm holiday pay treatment, and expect the employer-NI-comes-out-of-the-assignment-rate reality (it does — price accordingly). Avoid anything promising "85% take-home" — those are disguised remuneration schemes, and HMRC pursues the contractor, years later, with interest.
Whatever the structure, these stay true
- Set aside for tax on every payment (25–30% at contractor rates — see our Self Assessment guide for why January bills spike).
- Insurance is often contractually required: PI and PL, plus employers' liability if you incorporate.
- Pensions are the highest-return tax lever available to high-earning freelancers. Use the allowance before chasing anything exotic.
