What taxes do IT contractors pay? Updated for 2025/26

There are two ways to maximise your take-home pay as a contractor: negotiate the best contract rate, and don’t pay more tax than you have to.

This guide has been updated for the 2025/26 tax year.

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

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

Umbrella contractors are ’employees’, so you pay personal tax on your contract income, after making allowances for any employment costs. Your umbrella company will deduct tax on your behalf and pay any liabilities to HMRC.

Corporation Tax

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

The rates of CT increased significantly from April 2023 onwards.

Although companies still pay the old 19% rate for profits up to £50,000, a new 26.5% rate applies to profits between £50,000 and £250,000. Profits over £250,000 p.a. are taxed at 25%.

Your accountant will register your company for CT after it is incorporated, prepare your Annual Accounts each year, and submit them to Companies House (the registrar of companies in the UK) and HMRC.

You must pay your Corporation Tax within 9 months of your company 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 all the services you provide to your contracting clients. You can reclaim VAT on purchases you make via your company (subject to the conditions of any special VAT scheme you join).

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

You need to submit an online VAT return to HMRC each quarter and 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 handy safeguard against forgetting to make the payment manually.

You must register for VAT if your annual turnover is £90,000 or more (2025/26). Most accountants will advise you to register regardless, as you can reclaim the VAT on eligible purchases you make through your company.

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 dedicated guide to VAT.

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 doesn’t go above this threshold.

Income tax rates apply as follows:

• £0 – £12,570 – Personal Allowance 90%)
• £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 removed by £1 for every £2 you earn over this threshold.

National Insurance

Any NI owed on salaries is calculated via your company payroll.

Companies pay Employers’ National Insurance Contributions (NICs) on all salaries paid to their staff.

This applies to salaries above the secondary threshold, which was reduced to £5,000 in 2025/26.

If your company has 2+ employees, it might be able to benefit from the Employment Allowance. This cancels out your employers’ NI liabilities up to £10,500 p.a.

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

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

For 2025/26, the optimum salary for company directors is £12,570.

Read our dedicated guide to National Insurance.

Dividend Tax

As a company shareholder, you also pay tax on the dividends your company declares. Unlike salaried income, dividend income is not subject to NICs, providing limited company owners with a significant tax benefit.

You pay any tax owed on dividends via self assessment.

Read more about 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 31st January each year together with payment.

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

The payments on account amounts assume that you will earn the same income this year as you did in 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 you were as a traditional employee with your last employer.

After deductions have been made to your assignment income (employers’ NI, umbrella company fee, Apprenticeship Levy, and possibly pension contributions), your gross contract income is then subject to income tax and National Insurance.

Your umbrella provider will process your payroll on your behalf, and any deductions will be shown on the payslip.

Unless you have earned other income during each tax year (such as investment income, or income from letting out a property), you do not need to register for Self Assessment.

If you’re unsure whether any additional income should be declared via the self-assessment process, check with your account manager or an accountant.

IR35 Considerations

Introduced in 2000, the Intermediaries Legislation (a.k.a ‘IR35’) could significantly affect your income as a limited company contractor if your contract work is deemed to be ‘disguised employment’.

If you are caught by IR35, then all your income will be paid in the form of a ‘deemed salary’ (subject to PAYE).

Clearly, you should take steps to ensure that your assignments fall outside the scope of IR35; otherwise, you will be significantly worse off.

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

Read more about IR35 here.