How Much Tax Do UK Contractors Actually Pay?

"How much tax do contractors actually pay?" is one of the questions a calculator answers in 30 seconds and an article takes 2,000 words to explain. The honest answer is: it depends on your structure, your income, your expenses, your pension contributions and your IR35 status. But the underlying maths is the same for everyone — and once you see the layers, your own numbers stop being mysterious.

The three structures

UK contractors usually work through one of three setups:

• Agency PAYE: the agency employs you, runs PAYE, and absorbs employer costs.
• Umbrella company: a third party employs you, deducts employer costs from the assignment rate, then pays you under PAYE.
• Limited company (PSC): you own the company that contracts with the client. The company pays corporation tax; you pay personal tax on what you draw.

IR35 status matters most for the limited company route — outside IR35 unlocks the salary-and-dividends model, inside IR35 effectively forces you onto umbrella-style PAYE.

The 2025/26 personal tax bands

• Personal allowance: £12,570 (tapered away above £100,000).
• Basic rate (20%): £12,571 to £50,270.
• Higher rate (40%): £50,271 to £125,140.
• Additional rate (45%): above £125,140.
• Employee NI: 8% between £12,570 and £50,270, then 2%.
• Employer NI: 13.8% above the secondary threshold.
• Dividend allowance: £500. Dividend tax: 8.75% / 33.75% / 39.35%.
• Corporation tax: 19% (under £50k profit), 25% (over £250k), marginal between.

What you actually pay on agency PAYE

On agency PAYE you pay income tax and employee NI on your gross. Employer NI and the apprenticeship levy are on the agency, not on you (though they're factored into the rate they offer you).

On a £40,000 PAYE income you'd pay roughly £5,486 income tax and £2,194 employee NI — a total of about £7,680, leaving around £32,320 net (~80%). Pension auto-enrolment contributions come off before that, lowering your tax further.

What you actually pay on umbrella

On umbrella you pay the same income tax and employee NI as agency PAYE — but the assignment rate also has to absorb employer's NI (13.8%), the apprenticeship levy (0.5%) and the umbrella's margin before becoming your gross pay.

On a £400/day assignment rate over 220 days (£88,000 of fee income), you'd typically lose around £8,000 to employer's NI, £450 to the levy and £1,200 to umbrella margin — leaving around £78,000 of gross pay. From that, income tax and employee NI take roughly £21,000, leaving about £57,000 net.

What you actually pay through a limited company (outside IR35)

The classic salary-plus-dividends structure works like this:

• The company invoices the client and pays corporation tax on its profits.
• You pay yourself a small salary up to (or just above) the NI secondary threshold to avoid employer's NI but still earn state pension credit.
• You take the rest as dividends, paying dividend tax at 8.75%, 33.75% or 39.35% depending on your total income.

On £100,000 of fee income with a £12,570 salary and the rest as dividends, total tax (corporation tax + dividend tax) is typically in the £25,000–£28,000 range, leaving around £72,000–£75,000 net — significantly better than the same gross on PAYE.

What you actually pay inside IR35

Inside IR35 the limited company benefit disappears. Your assignment is taxed as employment income via the deemed payment mechanism, which is structurally identical to umbrella — same employer's NI, same apprenticeship levy, same PAYE deductions — without even the umbrella margin (because you're on your own payroll). Most contractors choose umbrella for inside IR35 work to avoid the admin overhead.

Effective tax rate by structure

Rough effective tax rates on £100k of fee income:

• Agency PAYE @ £100k gross: ~30% effective tax.
• Umbrella @ £100k assignment rate: ~38–40% effective (employer costs included).
• Inside IR35 PSC: same as umbrella, sometimes slightly worse.
• Outside IR35 PSC (small salary + dividends): ~24–28% effective.

Pension contributions move all of these meaningfully — and deserve a separate piece. See our best salary and dividend split guide for the limited-company numbers in detail.

Practical takeaways

• The single biggest tax decision a contractor makes is structure, not micro-optimisation within a structure.
• IR35 status drives that decision more than any other factor.
• Pension contributions are the most powerful legal lever across every structure.
• A good contractor tax calculator will model all three structures side by side from a single set of inputs — use it before you accept a contract, not after.