Question 1

How much does a contractor take home from a £500/day rate?

Accepted Answer

At £500/day for 220 days (£110,000/year), a limited company contractor outside IR35 typically takes home around £73,000–£76,000 (67–69%) after corporation tax, dividend tax and a director salary. An umbrella contractor inside IR35 takes home around £62,000–£65,000 (56–59%) after income tax and NI. The exact figure depends on pension contributions, accountant fees and your IR35 status.

Question 2

Is it worth operating through a limited company as a contractor?

Accepted Answer

For contractors outside IR35 earning above £300/day, a limited company typically saves £3,000–£8,000 per year compared to an umbrella company, after accountant costs. At lower rates or inside IR35, the tax advantage largely disappears and an umbrella is often simpler. The breakeven depends on your day rate, accountant fees, IR35 status and how much you value the simplicity of an umbrella.

Question 3

What is IR35 and how does it affect my take-home pay?

Accepted Answer

IR35 (off-payroll working rules) determines whether HMRC treats your contract work as employment. If you are inside IR35, you pay income tax and National Insurance as if you were an employee, eliminating most limited company tax advantages. Since April 2021, medium and large private-sector clients determine IR35 status. If inside IR35, an umbrella company is usually the most practical route.

Question 4

What is the optimal director salary for 2026/27?

Accepted Answer

For a sole director without other employees, £12,570 is the most tax-efficient salary in 2026/27. It uses your full Personal Allowance (no employee income tax), and employee NI is zero at this level. The company pays Employer NI of 15% on the £7,570 above the £5,000 secondary threshold (£1,135/year), which is deductible as a company expense.

Question 5

How is umbrella take-home calculated?

Accepted Answer

An umbrella company invoices the client for your day rate, deducts Employer NI (15% on earnings above £5,000) and their margin fee (typically £25–£35/week), then pays you the remainder as employment income subject to PAYE income tax and Employee NI. The Employer NI deduction is why umbrella take-home is noticeably lower than limited company take-home.

Question 6

Can I switch between limited company and umbrella mid-contract?

Accepted Answer

Yes, though it requires coordination with your agency and client. If your IR35 status changes during a contract, most contractors move to an umbrella for the inside-IR35 portion. Note that if you have retained profits in your limited company, you can still extract these as dividends after switching — consult an accountant before winding down a company.

Question 7

What expenses can a limited company contractor claim?

Accepted Answer

Outside IR35, you can claim legitimate business expenses against corporation tax: accountant fees, professional subscriptions, training, home office costs, business travel, equipment and software. Inside IR35, the 5% expenses allowance was abolished in April 2021 for large/medium clients — you can only claim expenses that your employment terms permit.

Question 8

How many days should I use to calculate my annual contract value?

Accepted Answer

Most contractors use 220 working days per year (52 weeks × 5 days = 260, minus 28 days holiday, minus 8 bank holidays, minus ~4 days average gap between contracts). Conservative estimates use 200–210 days. If you have a long-term single client, 230–240 days is realistic. The calculator defaults to 220 days.

Question 9

Do contractors pay VAT on their invoices?

Accepted Answer

If your limited company's VAT-taxable turnover exceeds £90,000 in any 12-month period, you must register for VAT and charge 20% VAT on invoices. Most contractors exceed this threshold easily. VAT-registered businesses you invoice can reclaim the VAT, so it is often neutral in a B2B context. Use our VAT calculator to work out the VAT element on your invoices.

Question 10

Is PAYE better than contracting through a limited company?

Accepted Answer

PAYE employment offers certainty — holiday pay, sick pay, employer pension contributions and no admin. Contracting through a limited company can significantly increase take-home pay if you are outside IR35, but you bear all employment risks yourself (no paid leave, no sick pay). The right choice depends on your tolerance for risk and admin, your day rate and your IR35 position.

Question 11

What corporation tax rate applies to contractors in 2026/27?

Accepted Answer

The small profits rate of 19% applies to companies with profits up to £50,000. The main rate of 25% applies above £250,000. Between £50,000 and £250,000, marginal relief applies — the effective rate rises gradually from 19% to 25%. Most contractors fall in the 19% band or lower marginal relief range.

Contract value	Ltd Co outside IR35	Umbrella inside IR35	PAYE equivalent
£300/day × 220 days = £66,000	~£47,500	~£42,800	~£45,300
£450/day × 220 days = £99,000	~£67,000	~£60,500	~£65,100
£600/day × 220 days = £132,000	~£84,500	~£76,200	~£80,800

Software	From	Best for
FreeAgentOften free	£19/mo or free*	Ltd company contractors	Compare →
CrunchIncludes accountant	£24.50/mo	Ltd company, all-in-one	Compare →
QuickBooksMost popular	£14/mo	Most integrations	Compare →

Contractor Take-Home Pay Calculator 2026/27

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How the contractor take-home calculation works

Limited company (outside IR35)

Umbrella company (inside IR35)

PAYE employment (benchmark)

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