What Tax Do UK Contractors Pay?
A complete guide to contractor taxation in the UK — from IR35 status to choosing between limited company and sole trader, with calculators to run your own numbers.
19–25%
Corporation Tax
10.75%
Dividend Tax (Basic)
6%
Class 4 NI
£12,570
Personal Allowance
How Contractor Tax Works in the UK
Contracting in the UK offers higher earning potential than permanent employment, but the tax landscape is significantly more complex. The amount of tax you pay depends on three key factors: your working structure (limited company, sole trader, or umbrella), your IR35 status, and how you extract money from your business.
Most contractors outside IR35 use a limited company to pay themselves a combination of a low salary and dividends. This is more tax-efficient because dividends are taxed at lower rates than salary. However, since the IR35 reforms in April 2021, the responsibility for determining IR35 status shifted to the end client for medium and large businesses, meaning many contractors have been pushed inside IR35.
Understanding the tax implications of each structure is crucial before setting your day rate. A contractor earning £500/day inside IR35 takes home significantly less than the same rate outside IR35.
Contractor Tax Structures Compared
Limited Company (Outside IR35)
The most tax-efficient structure for most contractors. Pay yourself a small salary (around £12,570) plus dividends. Corporation Tax at 19–25% applies first, then dividend tax at 10.75–39.35%.
Calculate Ltd company tax →Sole Trader
Simpler admin but higher tax. All profits taxed as income at 20–45%, plus Class 2 and Class 4 National Insurance. Best for contractors with lower earnings or simple affairs.
Calculate sole trader tax →Inside IR35 (Deemed Employee)
If caught by IR35, tax is deducted at source like a PAYE employee. You lose the tax advantages of a limited company but still bear contractor risks like no sick pay or holiday pay.
Calculate inside IR35 take-home →Umbrella Company
An umbrella company employs you and handles PAYE deductions. You receive a net salary after tax, NI, and the umbrella's margin. Common for inside IR35 assignments or short contracts.
Estimate umbrella take-home →Setting Your Day Rate
A common mistake new contractors make is dividing their target salary by 220 working days. This ignores several costs that permanent employees never see:
- Holidays: 25 days + 8 bank holidays = 33 unpaid days (reducing working days to ~220)
- Sick days: No SSP as a contractor — budget 5 days minimum
- Bench time: Gaps between contracts — typically 2–4 weeks per year
- Pension: No employer contributions — you fund your own
- Accountancy fees: £100–200/month for a limited company
- Insurance: Professional indemnity, public liability — £500–1,500/year
Use our Contractor Day Rate Calculator to find the minimum rate you need to match or exceed your permanent salary.
Understanding IR35
IR35 determines whether HMRC considers you to be a genuine business or a "disguised employee" who should be paying the same tax as someone on payroll. The key tests include:
Control
Does the client dictate how, when, and where you work? More control = more likely inside IR35.
Substitution
Can you send a qualified substitute in your place? A genuine right of substitution points outside IR35.
Mutuality of Obligation
Is the client obliged to offer work and are you obliged to accept it? Less obligation = outside IR35.
See our detailed Inside vs Outside IR35 comparison for a full breakdown of the financial difference, or use the IR35 Calculator to model your take-home pay under each scenario.
Optimal Salary & Dividend Strategy
For limited company directors, the most tax-efficient approach in 2026/27 is typically:
- Salary of £12,570 — uses full personal allowance, qualifies for State Pension, no Income Tax due
- Remaining profits as dividends — £500 dividend allowance tax-free, then 10.75% (basic), 35.75% (higher), 39.35% (additional)
- Pension contributions from the company — allowable expense reducing Corporation Tax, no personal tax or NI
Use the Salary vs Dividends Calculator to find the optimal split for your specific profit level.
Frequently Asked Questions
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