Contractors

How does tax change as a contractor?

When you move from permanent employment to contracting through a limited company, your entire tax position changes. Instead of PAYE deductions from a single salary, you pay yourself a tax-efficient combination of low salary and dividends, with your company paying corporation tax on profits. You also become responsible for VAT registration and returns if your turnover exceeds the threshold.

By Jordan Macey MAAT Reviewed by Noor Fiaz Updated 16 Apr 2026 2

Key takeaways

As an employee you pay income tax and Class 1 NICs through PAYE, while as a contractor you pay corporation tax on company profits and extract income through salary and dividends.
The optimal strategy for most limited company contractors is a low salary at the NIC threshold combined with dividends, which are taxed at lower rates than employment income.
You must register for VAT once your taxable turnover exceeds 90,000 pounds, and most contractor accountants recommend voluntary registration from the start to reclaim input VAT.
Corporation tax is currently 25 percent for profits over 250,000 pounds and 19 percent for profits under 50,000 pounds, with a marginal rate in between.
As a contractor you are responsible for filing your own self-assessment tax return each year to declare salary, dividends, and any other personal income.

As an employee, you pay your taxes via Pay-as-You-Earn (PAYE).

Through the system, income tax and Class 1 National Insurance contributions (NICs) are deducted from your salary before you receive it. Your employer will pay Class 1 NICs of 13.8% on salary you earn above the secondary threshold (£8,840 per annum for the 2020/21 tax year).

If you're contracting through an umbrella company, there won't be changes in how you pay your taxes. Just like permanent employees, your taxes are paid through PAYE.

How you pay your taxes changes if you choose to contract through your limited company. Here are the different taxes you need to be aware of:

Corporation tax: Tax levied on your company’s profits. The corporation tax rate is 19% for the 2021/22 tax year
Income tax: As a limited company director, you may need to pay taxes on the salary and dividends you draw from your business. We cover dividend taxes in greater detail in our guides on understanding dividend taxes and taxes, rates and allowances you need to know.
National Insurance contributions: Limited company directors may also be classed as employees. If you’re paid a salary over the lower profits limit, you’ll have to pay Class 1 NICs as an employee. The company will also pay Class 1 employer’s NICs on salaries the directors receive.
VAT: Depending on your turnover, you may need to register and pay VAT.

Frequently asked questions

What taxes do contractors pay through a limited company?

Your limited company pays corporation tax on its profits after deducting all allowable business expenses. You personally pay income tax and National Insurance on your salary through the company PAYE payroll, and income tax on any dividends you extract from retained profits. If your company is VAT registered, it also collects and remits VAT to HMRC on a quarterly basis.

How does the salary and dividend strategy work for contractors?

You pay yourself a low salary, usually around the NIC primary threshold of 12,570 pounds per year, and extract the remainder of your income as dividends from after-tax company profits. This approach minimises National Insurance contributions and takes advantage of the lower dividend tax rates, which are 8.75 percent at basic rate, 33.75 percent at higher rate, and 39.35 percent at additional rate.

Do contractors need to register for VAT?

VAT registration is compulsory once your taxable turnover exceeds 90,000 pounds in any rolling 12-month period. However, many contractors choose to register voluntarily from the very start of trading because most B2B clients can reclaim the VAT you charge on your invoices, and registration allows you to reclaim VAT on your own business purchases and allowable expenses.

How much more can a contractor take home compared to a permanent employee?

Take-home pay varies significantly by income level and individual circumstances, but a contractor earning the equivalent of a 60,000 pound permanent salary can typically take home 10 to 20 percent more through tax-efficient salary and dividend planning outside IR35. The exact figure depends on claimable expenses, pension contributions, IR35 status, and your personal tax situation.

What is the contractor corporation tax rate in 2025-26?

The main corporation tax rate is 25 percent on annual profits exceeding 250,000 pounds. A small profits rate of 19 percent applies to companies with profits under 50,000 pounds, which covers most single-director contractor companies. Profits falling between 50,000 and 250,000 pounds are subject to a marginal relief calculation that produces an effective rate somewhere between 19 and 25 percent.

Do contractors need to file a self-assessment tax return?

Yes. Even though your limited company files its own separate corporation tax return, you must also submit a personal self-assessment tax return each year declaring your salary, dividends, bank interest, and any other sources of personal income. The filing deadline for online returns is 31 January following the end of the relevant tax year.

What National Insurance do contractors pay?

On your salary you pay employee Class 1 NICs on earnings above the primary threshold, and your limited company pays employer Class 1 NICs on earnings above the secondary threshold. Crucially, no National Insurance is payable on dividend income at any level, which is a key reason why the salary-plus-dividend extraction strategy is significantly more tax-efficient than taking a higher salary.