How much tax does a UK contractor actually pay?
Direct Answer
A UK contractor operating through a limited company on £80,000 annual income typically pays a total tax bill of around £17,000–£19,000 — leaving a take-home of around £61,000–£63,000. This compares to roughly £27,000 in tax as a PAYE employee on the same gross — a saving of around £8,000–£10,000 per year. The exact figure depends on salary level, dividend choices, pension contributions, and whether VAT flat rate profit is included. Every figure on this page uses 2025/26 rates.
The two tax layers every contractor pays
Layer 1 — The company pays
- Corporation tax on profits: 19% (small profits rate, up to £50,000 profit) or up to 25% (main rate)
- Employer National Insurance on director's salary above £9,100: 13.8%
- Paid by the company before you see any money
Layer 2 — You pay personally
- Income Tax on salary above your Personal Allowance (£12,570)
- Dividend Tax on dividends above the Dividend Allowance (£500): 8.75% basic rate, 33.75% higher rate
- Declared on Self Assessment, paid 31 January
The key advantage: You never pay NI on dividends, and corporation tax at 19% is lower than income tax at 20–40%. This structural difference is why the Ltd company route saves contractors thousands every year.
What does that mean at my day rate?
Contractors think in day rates — not annual income. The table below converts common day rates to annual equivalent income (assuming 230 working days per year, allowing for holidays and between-contract gaps), and shows approximate take-home pay using the standard salary plus dividend strategy for 2025/26.
| Day rate | Annual billings (230 days) | Approx take-home | Effective tax rate |
|---|---|---|---|
| £250/day | £57,500 | ~£41,500 | ~28% |
| £300/day | £69,000 | ~£48,500 | ~30% |
| £350/day | £80,500 | ~£55,000 | ~32% |
| £400/day | £92,000 | ~£61,500 | ~33% |
| £450/day | £103,500 | ~£67,000 | ~35% |
| £500/day | £115,000 | ~£72,500 | ~37% |
| £600/day | £138,000 | ~£84,000 | ~39% |
| £700/day | £161,000 | ~£93,500 | ~42% |
How these figures are calculated
Assumes sole director, salary £12,570, remainder as dividends, standard employer NI, corporation tax at prevailing rates, no pension contributions, no VAT FRS benefit. Figures above £500/day include the personal allowance taper (see below). Your actual take-home will vary — use these as a planning guide, not a guarantee.
Above £500/day you start to hit the personal allowance taper — a trap that catches many higher-earning contractors by surprise. See the section below.
Tax at every income level — 2025/26
Assumes: sole director, salary £12,570, remainder as dividends, no pension contributions, 2025/26 rates. "Total tax" = corporation tax + employer NI + personal dividend tax + income tax.
| Annual income extracted | Corp tax | Employer NI | Personal tax | Total tax | Take-home | Effective rate |
|---|---|---|---|---|---|---|
| £30,000 | £3,277 | £479 | £1,510 | £5,266 | £24,734 | 17.6% |
| £40,000 | £4,827 | £479 | £2,385 | £7,691 | £32,309 | 19.2% |
| £50,000 | £6,377 | £479 | £3,231 | £10,087 | £39,913 | 20.2% |
| £60,000 | £7,927 | £479 | £6,856 | £15,262 | £44,738 | 25.4% |
| £70,000 | £9,477 | £479 | £9,231 | £19,187 | £50,813 | 27.4% |
| £80,000 | £11,027 | £479 | £11,606 | £23,112 | £56,888 | 28.9% |
| £100,000 | £14,127 | £479 | £16,356 | £30,962 | £69,038 | 31.0% |
| £120,000 | £17,227 | £479 | £21,106 | £38,812 | £81,188 | 32.3% |
| £150,000 | £21,877 | £479 | £31,231 | £53,587 | £96,413 | 35.7% |
Figures above £50,270 total income include higher-rate dividend tax (33.75%) on dividends in the higher-rate band. All figures approximate — your accountant will calculate exact figures based on your specific position.
The £100,000 trap — the most expensive thing that can happen to your tax bill
When your total income — salary plus dividends plus any other income — exceeds £100,000, HMRC begins withdrawing your Personal Allowance. For every £2 of income above £100,000, you lose £1 of your £12,570 Personal Allowance. By £125,140, your Personal Allowance is gone entirely.
The effect is devastating. In the £100,000–£125,140 band, you are effectively paying 60% marginal tax — 40% income tax on the withdrawn allowance plus 33.75% dividend tax on the dividends funding that income range.
Effective 60% tax — how it works
At £100,000 total income: Personal Allowance = £12,570. At £112,570: Personal Allowance = £6,285 (half withdrawn). At £125,140: Personal Allowance = £0 (fully withdrawn). Every £2 of income above £100,000 costs you £1 of tax-free allowance — which is then taxed at higher rates. The effective marginal rate in this band is approximately 60%.
| Total income | Personal Allowance remaining | Extra cost vs stopping at £100k |
|---|---|---|
| £100,000 | £12,570 | — |
| £105,000 | £10,070 | ~£2,000 extra tax |
| £110,000 | £7,570 | ~£4,000 extra tax |
| £115,000 | £5,070 | ~£6,100 extra tax |
| £120,000 | £2,570 | ~£8,200 extra tax |
| £125,140 | £0 | ~£10,000 extra tax |
The solution for most contractors at this income level is an employer pension contribution. Every pound contributed to your pension by your company reduces your total income for Personal Allowance purposes — pulling you back below £100,000 and out of the 60% trap. A £25,000 pension contribution from a contractor earning £125,000 can save over £10,000 in additional tax.
If your annual billings are above £430/day (approximately £100,000 per year), pension planning is not optional — it is the most important financial conversation you will have with your accountant. Autobooks models this as standard for every client approaching this threshold.
How this compares to PAYE employment
PAYE figures include both employee and employer NI.
| Annual gross income | PAYE employee total tax | Ltd contractor total tax | Annual saving |
|---|---|---|---|
| £30,000 | £7,086 | £5,266 | £1,820 |
| £50,000 | £13,232 | £10,087 | £3,145 |
| £60,000 | £17,432 | £15,262 | £2,170 |
| £80,000 | £25,432 | £23,112 | £2,320 |
| £100,000 | £35,432 | £30,962 | £4,470 |
At higher incomes the gap narrows because higher-rate dividend tax (33.75%) starts to approach PAYE rates — this is why pension contributions become increasingly important above £50,000.
What changes if you add pension contributions?
Employer pension contributions from the company reduce taxable profits (corporation tax relief at 19–25%), are not subject to NI (saving 13.8% employer + up to 8% employee NI vs salary), and do not affect your personal tax position.
Worked example: £80,000 income, £10,000 employer pension contribution
Without pension
Total tax ~£23,112 | Take-home ~£56,888
With £10,000 pension
Total tax ~£20,612 | Take-home ~£56,888 + £10,000 in pension
Net benefit: ~£2,500 in tax saved, plus £10,000 growing tax-free in pension. This is why pension is the most powerful tax tool for contractors — it reduces tax AND builds retirement wealth simultaneously.
What about VAT?
If you are on the VAT Flat Rate Scheme, the margin between what you charge (20%) and what you pay HMRC (typically 14.5% for IT services) is additional profit retained by the company.
Example: £80,000 of billings on IT services FRS rate (14.5%)
| VAT charged to clients (20%) | £16,000 |
| FRS payment to HMRC (14.5% of £96,000 VAT-inclusive) | −£13,920 |
| FRS profit retained | £2,080/year |
This effectively reduces your overall effective tax rate by 2–3%. Note: "limited cost trader" rules may apply — check with your accountant before registering.
Do I still pay student loan repayments as a contractor?
Yes — dividend income counts as income for Student Loan repayment purposes. This catches many new contractors by surprise.
- All plans (1, 2, and 5) — dividend income declared on your Self Assessment return is included in the income assessment. The Student Loans Company receives the figure from HMRC after you file.
- Repayments are calculated annually — unlike PAYE where repayments are deducted monthly, Self Assessment contractors pay student loan repayments as a lump sum alongside their January tax bill.
- Plan 2 threshold: £27,295 — repayments are 9% of income above this threshold. On £80,000 total income, that is approximately £4,800/year in student loan repayments on top of your tax bill.
- First year trap — if this is your first year contracting, your January tax bill will include income tax, any National Insurance, student loan repayments, and potentially the first payment on account for the following year. This can add up to a very large lump sum. Your accountant will forecast it in advance — make sure you set money aside throughout the year.
Student loan repayments are not included in the take-home figures in the tables above — they vary too much by plan, balance, and income level. Ask your accountant to model your specific position including student loan repayments.
Inside IR35 — what the numbers look like at every income level
If your contract is caught by IR35, your income is treated as employment income. There is no salary/dividend split, no corporation tax advantage, and no dividend allowance. The cost compounds at higher incomes.
| Annual contract value | Outside IR35 take-home | Inside IR35 take-home | Annual cost of IR35 |
|---|---|---|---|
| £40,000 | ~£32,300 | ~£27,800 | ~£4,500 |
| £60,000 | ~£44,700 | ~£37,200 | ~£7,500 |
| £80,000 | ~£56,900 | ~£48,500 | ~£8,400 |
| £100,000 | ~£69,000 | ~£58,500 | ~£10,500 |
| £120,000 | ~£81,200 | ~£68,000 | ~£13,200 |
IR35 is the single biggest financial decision a contractor makes
An incorrectly assessed IR35 determination costs the average contractor £7,000–£13,000 per year. A qualified contractor accountant should review every new contract before you sign — not after. Autobooks reviews IR35 status for every client as standard.
Key rates at a glance — 2025/26
| Tax / Threshold | Rate / Amount 2025/26 |
|---|---|
| Corporation tax (profits to £50k) | 19% |
| Corporation tax (profits £50k–£250k) | 19–25% marginal |
| Dividend tax — basic rate | 8.75% |
| Dividend tax — higher rate | 33.75% |
| Dividend allowance | £500 |
| Personal allowance | £12,570 |
| Employer NI (above £9,100) | 13.8% |
| Employee NI (above £12,570) | 8% |
| Higher rate income tax threshold | £50,270 |
Every contractor's tax position is different.
Autobooks will model your exact numbers — salary, dividends, pension — and run your complete contractor accountancy from £89+VAT/month.