Contractors face higher real costs than employees and no benefits

With the tax gap between limited company owners and employees substantially reduced by increases in corporate and dividend taxes, why do policymakers not account for the additional costs that contractors bear relative to employees?

Policymakers don’t understand how ‘contracting’ works

Tax-motivated incorporation narrative

In recent years, Government tax policy has increasingly focused on what it now calls ‘tax-motivated incorporation,’ based on the suspicion that many individuals incorporate solely to pay less tax on their earnings.

The tax hike in April 2016 was the perfect example of this – an indiscriminate tax increase, which affects all company owners, regardless of their motivations or the industries they work in.

Dividend allowance reductions

Just to make sure, the Government has already meddled with the new dividend tax rules multiple times, cutting the dividend allowance from £5,000 to £500 today.

Corporation Tax rate increases

Additionally, the Corporation Tax main rate rose from 19% to 25% from April 2023 (with a small profits rate of 19% for under £50,000 and marginal relief in between), significantly reducing many contractors’ retained profits.

Autumn Budget 2025 dividend changes

This pattern continued in the Autumn Budget 2025, with dividend tax rates set to rise by 2 percentage points from April 2026.

This will cost a typical contractor several hundred to over £1,000 in additional dividends per year (e.g., roughly £800 on £40,000 of dividends, or £1,800 on £90,000), in addition to previous hikes that have themselves cost the average contractor several thousand per year.

Media criticism and perception

What infuriates so many within the contracting industry, is the approach policymakers have towards those who work on their own account – and the “outrage” shown by some newspapers in recent years, who claim that limited company professionals are ‘tax dodgers’, or ‘pay just 20% tax on their earnings’.

What critics overlook

Those who frequently criticise the use of so-called ‘personal service companies’ forget:

Corporation Tax and personal tax layers

Limited company owners pay Corporation Tax on their profits (small profits rate 19% for profits under £50,000, main rate 25% for profits over £250,000, with marginal relief in between — unchanged for 2025/26 and into 2026), but also personal tax on any dividends and salary they draw down.

Intermediary working and IR35 impact

Almost all professional contractors are obliged to work through intermediaries; it is hardly a ‘choice’.

Many are further affected by off-payroll working rules (IR35), which, in many cases, impose deemed employment tax treatment without the full benefits of employment and prevent access to perks such as the Employment Allowance for single-director companies or those with deemed payments.

Higher reward but higher risk

A typical limited company contractor will earn more and have a lower effective tax percentage than a PAYE employee in some scenarios.

At the same time, contractors have no ‘perks’ of the job and less job security than employees, and successive tax changes have squeezed their profit margins more than ever before.

Typical costs a limited company professional has to bear

Professional and compliance costs

• Accountancy fees.
• Professional Indemnity Insurance.
• Other Insurances (e.g. Public / Employees’ Liability).
• Professional Memberships (e.g. IPSE).
• Training costs (e.g. Microsoft certifications).
• Software costs.
• Hardware costs (e.g. PC, printer, cabling, servers, etc.)
• Pension contributions (many employee contributions are subsidised, a significant perk).
• Stationery.
• Printing Costs.
• Postage Costs.
• Accommodation costs when away from home.
• Travel costs whilst on business.
• Business phone costs.
• Business broadband costs.
• Company administration costs (e.g. Confirmation Statement).
• Advertising / Marketing costs (e.g. LinkedIn membership).
• Health / Medical Insurance Cover (e.g. BUPA, WPA).
• Allowance for sick days taken (contractors don’t get paid when they are ill).
• Allowance for holidays taken (contractors don’t get paid when they’re on holiday).
• Allowance for maternity/paternity leave.
• Client-site catering (many employees receive discounted food, which is often restricted).
• Childcare vouchers (often subsidised for employees).

Have we missed anything?

If you can think of any additional costs contractors frequently incur, please get in touch, and we’ll add them to the list.