UK Contractor Tax Calculator

For most contractors earning over £35,000/year, a Ltd company typically results in higher take-home pay due to the tax-efficient salary/dividend split. The main benefit is that dividends are taxed at lower rates (8.75%–39.35%) than income tax (20%–45%), and you have more flexibility to control when and how you extract income. However, being a Ltd director involves more admin - filing accounts, corporation tax returns, and company secretarial duties. Below ~£30,000/year the tax savings may not justify the overhead. Always consult a contractor accountant.

IR35 (also called the off-payroll working rules) is HMRC legislation designed to catch 'disguised employees' - contractors who operate through Ltd companies but work in a way that resembles employment. If you are determined to be 'inside IR35', you are treated as an employee for tax purposes: your income is subject to full PAYE income tax and National Insurance, eliminating the tax advantages of the Ltd structure. In the public sector and large/medium private sector clients, the end client determines your IR35 status. This calculator shows what your take-home looks like under all three scenarios.

For 2026/27, most Ltd contractor accountants recommend a salary of £12,570 (the personal allowance threshold). At this level: no income tax is due on the salary, employee National Insurance is minimal (only on amounts above £12,570), and employer National Insurance is due on amounts above £5,000 at 15%. Any remaining profit after corporation tax can then be taken as dividends. The first £500 of dividends is tax-free (dividend allowance), with the remainder taxed at 8.75% (basic rate), 33.75% (higher rate), or 39.35% (additional rate).

From April 2023, the UK corporation tax rates are: 19% for profits up to £50,000 (small profits rate), 25% for profits of £250,000 and above (main rate). Profits between £50,000 and £250,000 attract 'marginal relief', effectively creating a tapered rate between 19% and 25%. For most contractors, profits typically fall in the small profits range, meaning a 19% corporation tax rate. This compares favourably to PAYE income tax rates of 20%–45%.

Yes - if your spouse or civil partner is a shareholder in your Ltd company, you can distribute dividends to them. This is tax-efficient because both of you get your own £500 dividend allowance, personal allowance, and basic rate band. For example, if you have £60,000 in distributable profits, splitting dividends equally means each person takes £30,000. Each person pays 8.75% on the basic rate portion rather than you paying 33.75% on the higher-rate portion. This can save thousands per year. HMRC scrutinises arrangements where the spouse does little work, so ensure the structure is commercially sound.

Common allowable expenses for Ltd contractors include: home office costs (if working from home), business travel and mileage, professional subscriptions, software and IT equipment, accountancy fees, training and professional development, business insurance, and a portion of mobile phone costs. Personal expenses like meals, commuting to a regular client site, or personal clothing are generally not allowable. Business expenses reduce your company's taxable profits, saving 19–25% in corporation tax. Always keep receipts and ensure expenses are 'wholly and exclusively' for business purposes.

The savings typically increase with higher day rates. At £300/day (~£66,000/year): Ltd advantage is approximately £4,000–£6,000. At £500/day (~£110,000/year): the advantage grows to approximately £8,000–£14,000. At £700/day (~£154,000/year): savings can be £12,000–£20,000+. These are rough estimates - actual savings depend on expenses, pension contributions, spouse splitting, and your specific circumstances. Inside IR35 at higher rates can reduce take-home significantly compared to outside-IR35 Ltd.

Employer pension contributions made through your Ltd company are highly tax-efficient: they are a deductible business expense (reducing corporation tax), they are not subject to National Insurance, and they do not count toward your personal income for tax purposes. The combined saving is typically 19%–25% corporation tax plus NI savings. Compare this to personal pension contributions which attract income tax relief but not NI relief. The annual pension allowance for 2026/27 is £60,000 (or 100% of earnings, whichever is lower). Unused allowance can be carried forward for up to 3 years.

When you retain profits in your Ltd company rather than extracting them as dividends, you avoid paying dividend tax on those profits this year. For a higher-rate taxpayer, that's a saving of 33.75% on retained profits. The money sits in your company and can be used for business investment, future salaries, or pension contributions. When you eventually wind up the company or sell it, retained profits may qualify for Business Asset Disposal Relief (BADR), taxed at just 14% (for disposals from 6 April 2025) up to a £1 million lifetime limit - compared to 33.75%–39.35% dividend tax. This can make a significant difference for contractors planning their exit. However, BADR rules require the company to be a trading company and you to be an employee or officer for at least 2 years. Always get professional advice on company wind-up strategy.

As a rough rule of thumb, a Ltd company structure typically starts to make financial sense from around £25,000–£35,000 annual revenue (roughly £115–£160/day at 220 days). Below this level, the tax savings may not outweigh the admin costs of running a Ltd company (typically £1,000–£2,500/year for an accountant, plus Companies House fees). The 'breakeven' point depends on your expenses and pension contributions - higher expenses and pension contributions reduce the gain from Ltd. Use this calculator to find your specific breakeven. At higher rates (£500+/day), the Ltd structure typically saves £8,000–£20,000+ per year over PAYE.