Take-home pay questions — answered plainly

How much does a UK contractor actually take home?

A UK contractor operating through a limited company outside IR35 on £400/day (approximately £88,000 annual contract income) typically takes home approximately £62,000–£65,000 per year using an optimised salary and dividend structure. This compares to approximately £55,000 as a PAYE employee on the same gross — a difference of £7,000–£10,000 per year. The exact figure depends on salary level, dividend choices, pension contributions, VAT scheme, and expenses claimed.

What is the tax breakdown for a £400/day contractor?

On £400/day (220 working days = £88,000 annual income), the approximate tax position outside IR35 is:

• Corporation tax on company profits approximately £9,000–£11,000 (depends on salary and expenses)
• Income Tax on salary approximately £0 (salary set at personal allowance)
• Dividend tax on dividends above the £500 allowance approximately £3,500–£5,000
• Total tax approximately £12,500–£16,000
• Take-home approximately £62,000–£65,000

Using employer pension contributions can reduce the tax bill further.

What is the difference between inside and outside IR35?

The difference is significant. Outside IR35 using an optimised limited company structure, a £400/day contractor takes home approximately £62,000–£65,000. Inside IR35, the same contractor is taxed as an employee — Income Tax and National Insurance on the deemed salary — leaving approximately £52,000–£54,000. The IR35 gap on a £400/day contract is approximately £10,000–£12,000 per year. This is why IR35 status matters enormously and why maintaining a strong outside IR35 position is worth the effort.

What is the most tax-efficient way to pay myself?

How do I calculate my day rate to take-home?

The approximate calculation for an outside IR35 contractor is: annual income = day rate × 220 working days; deduct company expenses (accountancy, insurance, home office, mileage, subscriptions); deduct employer pension contributions if applicable; remaining profit subject to corporation tax at 19–25%; remainder available as salary (£12,570) plus dividends; dividend tax at 8.75% on dividends above £500 allowance. As a rough rule of thumb, outside IR35 contractors on standard day rates keep approximately 70–75% of their gross contract income after all tax.

Why do contractors take home more than PAYE employees?

Limited company contractors pay corporation tax (19–25%) on profits rather than Income Tax (20–40%) and National Insurance (8–12%) on salary. Dividends are taxed at 8.75% in the basic rate band rather than 20% on salary. Legitimate business expenses reduce taxable profit. An optimised salary and dividend structure eliminates NI on the majority of income. These structural differences — not tax avoidance — explain the take-home advantage. IR35 exists specifically because HMRC wanted to prevent employees disguising employment as contracting to access these efficiencies.

How much does IR35 status affect my day rate?

On a £300/day rate, the annual take-home difference between outside and inside IR35 is approximately £7,000–£8,000. On £500/day the gap is approximately £14,000–£18,000. The higher your day rate, the larger the absolute gap because more income falls into the higher rate tax band under PAYE. This is the financial case for maintaining a strong outside IR35 position and reviewing every new contract carefully.

What expenses can reduce my tax bill?

Every legitimate business expense reduces your taxable profit and saves 19–25% corporation tax. Key expenses: accountancy fees (fully deductible), home office (£6/week flat rate, no receipts needed), business mileage (45p/mile), equipment and software, phone (business proportion), professional training, professional insurance. On £5,000 of legitimate expenses at 19% corporation tax, the saving is £950/year. A good accountant identifies missed claims that typically more than cover their fee.

Does paying into a pension improve my take-home?

Pension contributions do not improve take-home directly — they divert income into a pension rather than your pocket. However, they significantly reduce your tax bill. Employer pension contributions are fully deductible against corporation tax with no Income Tax or NI. On a £10,000 contribution at 19% rate, you save £1,900 in tax. You are effectively putting £10,000 into your pension at a net cost of £8,100. This improves your overall wealth position even though it reduces immediate take-home.

What is the take-home pay for a £500/day contractor?

A £500/day contractor (220 days = £110,000 annual income) outside IR35 typically takes home approximately £75,000–£80,000 using an optimised structure. Total tax paid (corporation tax + dividend tax) is approximately £18,000–£22,000. Inside IR35 on the same rate, take-home drops to approximately £63,000–£67,000. The IR35 gap at this day rate is approximately £12,000–£15,000 per year — a significant financial incentive to protect your outside IR35 status.

How do I find out my exact take-home figure?

The exact figure depends on your specific salary level, dividend amount, pension contributions, expenses, and VAT scheme. The free Autobooks Wealth Gap quiz gives you a personalised estimate based on your answers — it takes 3 minutes and shows you where you may be losing money compared to an optimised setup. For a precise calculation tailored to your situation, book a free 20-minute call.