Contractor vs PAYE Calculator UK 2025/26

Outside IR35, contracting through a limited company is often more tax efficient because you can split income between salary and dividends, and dividends are taxed at lower rates (8.75%/33.75%/39.35%) than salary. However, the gap has narrowed: corporation tax rose to 25% on profits above £250k in 2023, and the dividend allowance was cut to £500 in 2024. For typical day rates, the advantage is £2,000–£8,000/yr over PAYE.

IR35 is anti-avoidance legislation targeting contractors who work like employees but bill through a limited company. If HMRC determines you fall inside IR35, your income is treated as employment income, and you pay income tax and National Insurance as if you were employed. The contract itself, working practices (substitution, control, mutuality of obligation) determine your status.

Use the Compare Pay mode (top button). Set Scenario A to your permanent salary, then set Scenario B to your contract day rate with the relevant IR35 status. The comparison table shows the annual difference across all deductions.

Outside IR35, allowable expenses (travel to client sites not your regular workplace, equipment, professional subscriptions, accountancy fees) reduce your company's profit, lowering corporation tax. Inside IR35, most workplace expenses are disallowed. This calculator does not model expense claims — speak to a contractor accountant.

The October 2024 budget increased employer National Insurance to 15% (from 13.8%) and reduced the secondary threshold to £5,000. For inside-IR35 contractors where the fee payer deducts employer NI from the contract rate, this reduces take-home pay. The calculator applies the 2025/26 15% rate.