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.
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.
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.
Inside IR35 — what the numbers look like
If your contract is caught by IR35, your income is treated as employment income. There is no salary/dividend split. The cost is significant.
Inside IR35 — £80,000 contract
~£49,000–£51,000
Approximate take-home
Outside IR35 — £80,000 contract
~£57,000–£61,000
Approximate take-home
Difference: £8,000–£10,000 per year
IR35 status is the single biggest financial decision a contractor makes. A qualified contractor accountant should review every new contract.
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.