Contractor Tax Calculator UK: IR35 & Take-Home | Calclens

Calclens Guide

Contractor tax, worked out in order

Q: How do I work out my contractor day rate?

Start from the annual income you need, then divide by your billable days, not 365. Most contractors bill around 220 days a year once holiday, illness, admin and gaps between contracts are taken out. Add a margin for the costs an employer would otherwise cover: pension, equipment, training and downtime. Work back from your target income to the rate that delivers it.

Q: Should I be a sole trader or a limited company as a contractor?

It mostly comes down to profit and risk. Below roughly £30,000 to £40,000 profit, the extra accountancy and admin of a limited company often outweigh the tax saving. Above that, the salary-and-dividend split usually wins, and a limited company adds limited liability and credibility with agencies. Many contracts also require you to operate through a company.

Q: What does being inside IR35 actually cost me?

Inside IR35, you are taxed broadly as if you were an employee, with Income Tax and National Insurance on most of your income, and the dividend efficiency of a limited company largely disappears. Outside IR35, you can use the small-salary-plus-dividends approach. On the same contract, the take-home difference often runs to several thousand pounds a year, so status should be settled before you accept the work.

Q: What's the most tax-efficient salary and dividend split?

The common approach is a salary up to the £12,570 personal allowance, then dividends on top, because dividends carry no National Insurance. Dividend tax then applies above the £500 allowance at 10.75% basic rate and 35.75% higher rate. The exact best split depends on your total income and whether the company can claim the salary against Corporation Tax, so it is worth calculating rather than copying a rule of thumb.

Q: When do I have to register for VAT as a contractor?

You must register once your taxable turnover passes £90,000 over any rolling 12-month period, or if you expect to cross it within the next 30 days. It is not measured by tax year; it resets monthly, so track your rolling total. Some contractors register voluntarily below the threshold to reclaim VAT on purchases and appear more established to business clients.

Q: Can my limited company pay into my pension?

Yes, and it is one of the most efficient ways to extract profit. Employer contributions are usually an allowable business expense, so they reduce Corporation Tax, and they reach your pension without Income Tax, National Insurance or dividend tax. The annual allowance is £60,000 for most people, though it can taper for very high earners and is limited by company affordability.

Q: Do dividends count as income for a mortgage?

Generally yes. Most lenders assess limited-company directors on salary plus dividends, typically averaged over the last two or three years of accounts or SA302s. Some specialist lenders will instead use your share of retained company profit, which can help if you have left money in the business. Lumpy dividend history can reduce how much you can borrow.

Going contract changes everything about how you’re taxed. This guide runs the seven calculations that decide what you actually keep — from setting a day rate to IR35, salary vs dividend and VAT — in the order a contractor accountant would.

1Day rate 2Ltd vs sole trader 3IR35 4Salary vs dividend 5Profit 6VAT 7Pension

A £600/day contract bills £132,000 a year — but what do you keep?

£132,000

invoiced

IR35?

changes everything

£500

dividend allowance

A permanent salary is simple — tax comes out before you see it. Contracting is the opposite: the money lands gross, and what you keep depends on a chain of decisions you make yourself. Price the work wrong, mistake your IR35 status, or pick the wrong salary-dividend mix, and you hand over thousands you didn’t need to. Each calculator below settles one decision — run them in order and they answer the only question that matters: what actually reaches your account.

The contractor path, step by step

Seven calculations in the sequence they actually arise — pricing the work first, choosing a structure, checking IR35, then extracting profit as tax-efficiently as the rules allow.

Price the work

What day rate do you actually need?

A contract day rate isn’t a salary divided by 365. You bill around 220 working days a year once holiday, illness and gaps between contracts are stripped out — and you fund your own pension, kit and downtime. Work back from the income you need to the rate that delivers it before you quote a client.

Day Rate Calculator →

Choose a structure

Sole trader or limited company?

Below roughly £30,000–£40,000 profit the admin of a limited company rarely pays for itself; above it, the salary-and-dividend split usually wins on tax. A limited company also gives you limited liability and looks more credible to agencies. Compare the take-home both ways before you register anything.

Sole Trader vs Ltd Calculator →

The status that changes everything

Are you inside or outside IR35?

Inside IR35, you’re taxed broadly like an employee and the limited-company efficiencies mostly vanish. Outside, the salary-dividend split is yours to use. The difference on the same contract can be many thousands a year, so check status — based on control, substitution and mutuality of obligation — before you accept.

IR35 Inside vs Outside Calculator →

How to pay yourself

What’s the best salary vs dividend split?

The classic move is a small salary up to the £12,570 personal allowance, then dividends on top — because dividends carry no National Insurance. But dividend tax now bites earlier: only £500 is tax-free, then 10.75% basic and 35.75% higher rate. Find the split that leaves the most after both taxes.

Salary vs Dividend Calculator →

What the company keeps

How much profit is left after Corporation Tax?

Dividends can only be paid from profit after Corporation Tax, so this is the pot you’re actually splitting. Knowing the post-tax profit stops you voting dividends the company can’t legally cover — an easy and costly mistake. Work out what’s genuinely distributable before you draw it.

Limited Company Profit Calculator →

The threshold to watch

Do you need to register for VAT?

Cross £90,000 of taxable turnover on a rolling 12-month basis and VAT registration becomes compulsory within 30 days. Many contractors register voluntarily below that to look established and reclaim input VAT, and some use the Flat Rate Scheme (open under £150,000). Track your rolling total so the threshold doesn’t catch you out.

VAT Threshold Calculator →

The efficient extraction

How much can the company put into your pension?

Employer pension contributions from your company are usually an allowable expense, cutting Corporation Tax while moving money to you without Income Tax, NI or dividend tax. With the annual allowance at £60,000 for most, it’s often the single most efficient way to extract profit. See what your company can contribute.

Director Pension Calculator →

Why the order matters

The instinct is to start with “ltd or sole trader?” — but that’s step two, not step one. Until you’ve priced the work, you don’t know how much profit there is to structure, and the structure question is meaningless without a number behind it.

And IR35 comes before the salary-dividend split for a reason: if you’re inside IR35, most of the dividend efficiency disappears, so optimising a split you can’t use is wasted effort. Settle status first, then — and only then — work out how to pay yourself. Get the sequence right and each calculation narrows the next; get it backwards and you optimise decisions that later steps overrule.

Dividend tax rates contractors pay

Dividends are how most limited-company contractors take the bulk of their income, so these rates drive the salary-vs-dividend decision. They sit on top of your salary in the tax stacking order.

Band (total income)	Dividend tax rate
First £500 (dividend allowance)	0%
Basic rate (up to £50,270)	10.75%
Higher rate (£50,271–£125,140)	35.75%
Additional rate (over £125,140)	39.35%

The key advantage holds: dividends carry no National Insurance, which is why a small salary plus dividends usually beats a large salary. But with the allowance down to just £500 and basic and higher dividend rates having risen, the gap is narrower than it once was — so the optimal split is worth calculating, not assuming. Run your own figures through the salary vs dividend calculator.

Start here

Ready to run your own numbers?

Begin with your day rate — the figure every later decision builds on — then work down the path one calculator at a time.

Day Rate Calculator →

A contractor’s path, worked through

One realistic example, run through the whole sequence, to show how the steps connect in practice.

Worked example Sam · IT contractor · £500/day, outside IR35

Day rate. Sam bills around 220 days a year at £500, so roughly £110,000 of company income before costs — not the £130,000 a naive 260-day count would suggest.
Structure. At that level a limited company beats sole trader comfortably, so Sam runs through a company.
IR35. The contract is outside IR35, so the salary-and-dividend split is available — worth several thousand a year versus an inside-IR35 equivalent.
Salary vs dividend. Sam takes a small salary up to the £12,570 personal allowance, then dividends — no National Insurance on the dividends.
Profit & pension. After Corporation Tax, Sam leaves some profit in the company and makes an employer pension contribution, cutting Corporation Tax and extracting money free of Income Tax, NI and dividend tax.

The takeaway: run backwards — picking a salary-dividend split before checking IR35 — and Sam could have optimised a structure the contract didn’t allow. In order, each step narrowed the next, and the pension move at the end did more for take-home than tweaking the split ever would.

Five mistakes contractors make

The errors that recur among UK contractors — and the ones that cost the most.

Setting a day rate by dividing salary by 260

A permanent salary covers holiday, sick pay and a pension; a day rate must fund all of those itself. Dividing by a full 260 working days ignores the ~40 days you won’t bill plus the costs an employer used to cover. Work back from target income across realistic billable days instead.

Cost: undercharging by 15–25% Fix: price on ~220 billable days

Optimising the split before checking IR35

If a contract is inside IR35, most of the salary-and-dividend efficiency disappears. Fine-tuning your split before settling status is wasted effort, and assuming you’re outside when you’re not invites a tax bill. Confirm IR35 first, then optimise.

Cost: thousands, plus HMRC risk Fix: settle IR35 status first

Voting dividends the company can’t cover

Dividends can only come from profit after Corporation Tax. Paying more than the company has in distributable profit is an illegal dividend that HMRC can reclassify — sometimes as salary or a loan, with extra tax. Check post-tax profit before drawing.

Cost: reclassified income, more tax Fix: draw only from post-CT profit

Not setting aside money for tax

Income lands gross, so the tax is yours to reserve. Contractors who spend it all face a brutal January. Set aside roughly 25–35% of income in a separate account for Corporation Tax, dividend tax and personal tax as you go.

Cost: a January cash-flow crisis Fix: ring-fence 25–35% as you earn

Ignoring the company pension lever

Employer pension contributions are usually an allowable expense, cutting Corporation Tax while reaching you free of Income Tax, NI and dividend tax. Many contractors over-focus on the salary-dividend split and overlook the most efficient extraction route of all.

Cost: needless tax on extracted profit Fix: use employer pension contributions

Contractor tax questions, answered

How do I work out my contractor day rate?

Start from the annual income you need, then divide by your billable days — not 365. Most contractors bill around 220 days a year once holiday, illness, admin and gaps between contracts are taken out. Add a margin for the costs an employer would otherwise cover: pension, equipment, training and downtime. The day rate calculator works back from your target income to the rate that delivers it.

Should I be a sole trader or a limited company as a contractor?

It mostly comes down to profit and risk. Below roughly £30,000–£40,000 profit, the extra accountancy and admin of a limited company often outweigh the tax saving. Above that, the salary-and-dividend split usually wins, and a limited company adds limited liability and credibility with agencies. Many contracts also require you to operate through a company. Compare both with the sole trader vs ltd calculator.

What does being inside IR35 actually cost me?

Inside IR35, you’re taxed broadly as if you were an employee — Income Tax and National Insurance on most of your income — and the dividend efficiency of a limited company largely disappears. Outside IR35, you can use the small-salary-plus-dividends approach. On the same contract, the take-home difference often runs to several thousand pounds a year, which is why status should be settled before you accept the work, not after. The IR35 calculator shows the gap.

What’s the most tax-efficient salary and dividend split?

The common approach is a salary up to the £12,570 personal allowance (or the National Insurance threshold), then dividends on top, because dividends carry no NI. Dividend tax then applies above the £500 allowance at 10.75% basic and 35.75% higher rate. The exact best split depends on your total income and whether the company can claim the salary against Corporation Tax — so it’s worth calculating rather than copying a rule of thumb. Use the salary vs dividend calculator.

When do I have to register for VAT as a contractor?

You must register once your taxable turnover passes £90,000 over any rolling 12-month period, or if you expect to cross it within the next 30 days. It’s not measured by tax year — it resets monthly, so track your rolling total. Some contractors register voluntarily below the threshold to reclaim VAT on purchases and appear more established to business clients. The VAT threshold calculator helps you see where you stand.

Can my limited company pay into my pension?

Yes, and it’s one of the most efficient ways to extract profit. Employer contributions are usually an allowable business expense, so they reduce Corporation Tax, and they reach your pension without Income Tax, National Insurance or dividend tax. The annual allowance is £60,000 for most people, though it can taper for very high earners and is limited by company affordability. See what’s possible with the director pension calculator.

Do dividends count as income for a mortgage?

Generally yes — most lenders assess limited-company directors on salary plus dividends, typically averaged over the last two or three years of accounts or SA302s. Some specialist lenders will instead use your share of retained company profit, which can help if you’ve left money in the business. It’s one reason contractors keep clean, consistent records: lumpy dividend history can reduce how much you can borrow.

How much should I set aside for tax as a contractor?

As a rule of thumb, a limited-company contractor should reserve roughly 25–35% of income for Corporation Tax, dividend tax and any personal tax, with the exact figure depending on your profit and how you draw it. Keeping tax money in a separate account is the simplest way to avoid a January shock. Working through the calculators in this guide gives you a far more precise figure than any single percentage.

How this guide is built

The sequence reflects the order a UK contractor actually faces these decisions — pricing the work, choosing a structure, settling IR35, then extracting profit as efficiently as the rules allow — the same order a specialist contractor accountant would work through.

Every calculator linked here is a free Calclens tool with its own methodology and worked examples. Dividend rates, the VAT threshold, the personal allowance and pension limits follow current HMRC and GOV.UK guidance; the individual calculator pages carry the detailed figures and sources.

Definitions and sources: methodology · sources.

Not tax or financial advice. This guide is for general information and links to calculators that produce estimates. IR35 status and tax outcomes depend on your specific contracts and circumstances — confirm them with a qualified accountant or tax adviser before acting.