Question 1

What does outside IR35 mean?

Accepted Answer

A contract is outside IR35 when the working relationship between the contractor and end-client is genuinely that of a self-employed business rather than a disguised employee. Outside-IR35 contractors can pay themselves through a limited company using a mix of salary and dividends, which is generally more tax-efficient than PAYE.

Question 2

Why do contractors use limited companies?

Accepted Answer

A personal service company (PSC) lets contractors invoice clients, claim legitimate business expenses, contribute to a pension from the company and extract income via salary and dividends. For outside-IR35 work this can result in a higher net take-home than umbrella PAYE.

Question 3

How are dividends taxed in 2025/26?

Accepted Answer

The first £500 of dividends is tax-free under the dividend allowance. After that, dividends are taxed at 8.75% in the basic-rate band, 33.75% in the higher-rate band and 39.35% in the additional-rate band. Dividends sit on top of any salary when calculating which band they fall into.

Question 4

What is corporation tax?

Accepted Answer

Corporation tax is the tax a UK limited company pays on its profits. For 2025/26 the small profits rate is 19% on profits up to £50,000, and the main rate is 25% on profits over £250,000. Profits between those limits are taxed at a marginal effective rate of 26.5% on the excess above £50,000.

Question 5

Is outside IR35 better than umbrella?

Accepted Answer

On the same day rate, outside-IR35 limited company contracting usually gives a higher take-home than umbrella PAYE because employer NI and the apprenticeship levy do not apply, and income can be split between low salary and dividends. The trade-off is more admin, accountant fees and IR35 risk.

Question 6

Can contractors claim expenses?

Accepted Answer

Limited company contractors can claim genuine business expenses incurred wholly and exclusively for the business — including accountancy fees, equipment, software, business travel, professional insurance and a portion of home office costs. These reduce taxable company profit before corporation tax.

Question 7

What salary should contractors take?

Accepted Answer

Most director-shareholders pay a salary at or near the personal allowance (£12,570) or the secondary NI threshold (£5,000) to balance employer NI cost against the corporation tax deduction the salary creates. The optimal level depends on whether the company has the £5,000 Employment Allowance available.

Question 8

What is retained company profit?

Accepted Answer

Retained profit is the after-tax money kept inside the company rather than paid out as dividends. Some contractors retain profit for cash-flow reserves, future investment or to draw out in lower-income years to manage personal tax bands.

Question 9

What is retained profit?

Accepted Answer

Retained profit is company profit left over after corporation tax that has not been distributed to shareholders as dividends. It sits on the balance sheet as reserves and can be paid out in a later tax year, reinvested in the business or used as a cash buffer.

Question 10

Should contractors retain profits in their company?

Accepted Answer

Retaining profits can be useful if you would otherwise push personal income into a higher tax band, if you want a contingency fund, or if you may take a low-income year (parental leave, sabbatical) when dividends could be drawn more tax-efficiently. The right balance depends on personal circumstances and is best discussed with an accountant.

Question 11

How is corporation tax calculated in the UK?

Accepted Answer

For the 2025/26 tax year, UK corporation tax is 19% on company profits up to £50,000 (small profits rate) and 25% on profits over £250,000 (main rate). Profits between £50,000 and £250,000 are taxed at the main rate of 25% with marginal relief, giving an effective rate of 26.5% on the slice above £50,000.

Question 12

What is marginal relief?

Accepted Answer

Marginal relief is a tapered reduction in corporation tax for companies with profits between £50,000 and £250,000. HMRC calculates it as 25% of profits less 3/200 × (£250,000 − profits). It smooths the jump between the 19% small profits rate and the 25% main rate so companies are not penalised for crossing the lower threshold.

Annual contract incomeContract income excludes VAT.	£115,000
Less: director salary	−£12,570
Less: employer NI on salary	−£1,136
Less: business expenses	−£6,000
Less: accountant fees	−£1,200
Less: company pension contribution	−£5,000
Taxable company profit	£89,095
Less: corporation tax	−£19,860
After-tax distributable profit	£69,234
Dividends paid (100%)	£69,234
Less: dividend tax	−£13,898
Less: PAYE income tax on salary	£0
Less: employee NI on salary	£0
Less: student loan	£0
Net annual take-home	£67,907
Retained company profit (0%)	£0

Factor	Agency PAYE Employee of the agency	Umbrella Company Inside IR35 default	Limited Company Outside IR35
Tax treatment	PAYE Income Tax + employee NI on full assignment rate.	PAYE + employee & employer NI + apprenticeship levy + margin.	Salary up to NI threshold + dividends; corporation tax 19–25%.
Typical take-home	≈ 60–68% of assignment rate after PAYE & NI.	≈ 55–65% after employer costs and umbrella margin.	≈ 75–82% on a typical £500/day contract outside IR35.
Admin burden	None — agency runs payroll, you receive a payslip.	Minimal — submit timesheet, umbrella handles payroll.	Higher — bookkeeping, VAT, payroll, annual accounts, CT600.
Pension flexibility	Auto-enrolment workplace pension at statutory minimums.	Salary sacrifice usually available — efficient employer contributions.	Fully flexible — employer contributions up to £60k annual allowance.
Expense treatment	No business expenses claimable against agency income.	Limited; SDC rules generally block travel & subsistence.	Wholly & exclusively business expenses fully deductible.
Best for	Short bookings or contractors who want zero admin.	Inside IR35 engagements and short-term contracts.	Outside IR35, longer engagements, higher day rates.

Factor	Inside IR35 Taxed as employment	Outside IR35 Genuine business-to-business
Tax treatment	Full PAYE Income Tax + Class 1 NI on deemed employment income.	Tax-efficient salary + dividends through your limited company.
Take-home pay	Lower — typically 55–65% via umbrella, no salary/dividend split.	Higher — typically 75–82% net retention after corporation & personal tax.
Who decides status	Public sector & medium/large private clients issue a Status Determination Statement (SDS).	Same SDS process; small private clients leave the determination to the contractor.
Admin burden	Low — umbrella runs payroll; little for you to manage.	Higher — limited company filings, VAT and IR35 evidence to retain.
Pension flexibility	Salary sacrifice via umbrella — efficient but capped by assignment rate.	Employer contributions from the company up to £60k annual allowance.
Expense treatment	SDC rules typically block travel, subsistence and home-office claims.	Genuine business expenses (travel, equipment, software) fully deductible.
Risk profile	Low — status agreed up front, deductions handled by fee-payer.	Status must hold up to HMRC review; keep a contract & working-practices review.

UK Contractor Calculator — outside IR35 limited company take-home pay

Contractor Calculator (Outside IR35)

Profit Distribution

Income & tax breakdown

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Why trust these calculations?