What taxes do IT contractors pay? Updated for 2026/27

There are two main ways to maximise your take-home pay as a contractor: negotiate a strong contract rate in the first place and structure your income efficiently

This guide has been updated for the 2026/27 tax year.

Depending on whether you are an umbrella or limited company contractor, you will be subject to a number of taxes.

Limited companies are separate legal entities from their directors, so your company pays tax on its profits, and you (as an individual) pay tax on any income you draw from the company.

Umbrella contractors are ’employees’, so you pay personal tax on your contract income after employment costs are deducted. Your umbrella company deducts tax on your behalf and pays any liabilities to HMRC.

The only relevant tax increase for contractors for 2026/27 is a 2p rise in dividend tax. Read more here.

Corporation Tax

All companies pay Corporation Tax (CT) on their annual profits.

The CT rates increased significantly from April 2023 onwards.

Although companies still pay 19% on profits up to £50,000, marginal relief applies on profits between £50,000 and £250,000, resulting in an effective rate of up to 26.5%. Profits over £250,000 are taxed at 25%.

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Your accountant will register your company for CT after incorporation, prepare your Annual Accounts each year, and submit them to Companies House and HMRC.

You must pay your Corporation Tax within 9 months of your company’s year-end.

Find out more in our Corporation Tax guide.

Value Added Tax

Most contractor companies also register for Value Added Tax (VAT).

VAT applies to the services you provide to your clients. You can reclaim VAT on purchases you make via your company (subject to the conditions of any scheme you join).

The standard VAT rate (which you charge on invoices sent to your clients) is 20%.

You need to submit an online VAT return to HMRC each quarter and make an electronic payment.

If you choose to pay via direct debit, you have at least an extra 7 days to pay your VAT. This is also a useful safeguard against missing a payment.

You must register for VAT if your annual turnover is £90,000 or more (2026/27). Many accountants will still recommend voluntary registration, as you can reclaim VAT on eligible purchases.

Joining the Flat Rate VAT scheme, which provides a discount for new companies during their first year in business, could benefit you financially.

Unfortunately, in recent years, HMRC has restricted the eligibility of smaller companies to use this scheme.

Find out more in our VAT guide for contractors.

Income Tax

You pay income tax on your salary. This is processed via your company payroll.

Most individuals can use their Personal Allowance, which means the first £12,570 of income is tax-free. Many contractors opt to pay themselves a salary that does not exceed this threshold.

Income tax rates apply as follows:

• £0 – £12,570 – Personal Allowance (0%)
• £12,571 – £50,270 – Basic Rate (20%)
• £50,271 – £125,140 – Higher Rate (40%)
• Over £125,140 – Additional Rate (45%)

If your income is over £100,000, your Personal Allowance is reduced by £1 for every £2 earned above this threshold.

National Insurance

Any National Insurance owed on salaries is calculated via your company payroll.

Companies pay Employers’ National Insurance Contributions (NICs) on salaries above the secondary threshold, which is £5,000 for the 2026/27 tax year.

If your company has two or more employees, it may be able to benefit from the Employment Allowance, which can reduce employers’ NI liabilities by up to £10,500 per year.

As an individual, you also pay Employees’ NICs on the salary you draw from your company.

Most contractors pay themselves a low salary, typically between the Secondary and Primary NIC thresholds, to minimise exposure to both income tax and NICs.

For 2026/27, the optimum salary for company directors remains £12,570.

Read our guide to National Insurance.

Dividend Tax

As a company shareholder, you also pay tax on dividends declared by your company. Unlike salary, dividend income is not subject to NICs, which is one of the main tax advantages of operating through a limited company.

The basic and higher dividend tax rates both increased by 2p for the 2026/27 tax year.

The dividend allowance is £500 for the 2026/27 tax year.

You pay any tax owed on dividends via self assessment.

Find out the latest rates in our guide to dividends and how they are taxed.

Self Assessment

Individual limited company contractors settle their income tax liabilities via self assessment.

You must submit your tax return by 31 January each year, together with any tax owed.

You may also need to make two payments on account (31 January and 31 July) towards the current year’s tax liability.

These payments assume that your income will be similar to the previous tax year.

Read more in our guide to the Self Assessment process.

You can view the current income tax and NIC rates on the HMRC website, and dividend tax rates here.

Umbrella Company Tax

As an umbrella company employee, you are taxed in the same way as a traditional employee.

After deductions have been made to your assignment income (including employers’ NI, umbrella company fees, the Apprenticeship Levy, and possibly pension contributions), your remaining income is subject to PAYE income tax and National Insurance.

Your umbrella provider processes payroll on your behalf, and all deductions will be shown on your payslip.

Unless you have additional income (such as rental or investment income), you will not usually need to complete a Self Assessment tax return.

If you are unsure, check with your umbrella provider or an accountant.

IR35 considerations

Introduced in 2000, the Intermediaries Legislation (IR35) can significantly affect your income if your contract is deemed to be disguised employment.

If you are caught by IR35, your income is treated as a deemed salary and taxed under PAYE.

In practice, you should understand your IR35 position and ensure your working arrangements support an outside IR35 status where appropriate.

Umbrella contractors are not affected by IR35, as they are already taxed as employees.

Read more about IR35.