Contractor Taxes Demystified: What to Expect

Contractor Taxes Demystified: What to Expect


Being a contractor is a flexible way to work, a way that brings with it a great deal of freedom and room for professional growth. It’s easy to see why contracting is something a lot of professionals are keen to do. But, if you want to truly reap the rewards of contracting, there is a trade off. As a contractor, you need to keep on top of your tax obligations. You’re not paid via PAYE, and so you need to deduct, calculate and pay the money yourself. This might seem confusing at first - and if we’re honest, it can be slightly complicated to begin with - but it’s likely to be a lot simpler than you thought.



At Go Limited, we’ve seen a lot of contractors worry about taxes, some even let that worry put them off contracting altogether. Whether it’s because you’re brand new to contracting, or because your earnings have suddenly increased, keeping on top of taxes can feel daunting. But, it’s not something to shy away from. 

You have 45 days to return items for a full refund, with or without a receipt. Items must still have their original tags.

You have 45 days to return items for a full refund, with or without a receipt. Items must still have their original tags.

You have 45 days to return items for a full refund, with or without a receipt. Items must still have their original tags.

• contractor weighing pros and cons of limited company IR35

Being Tax-Savvy Matters as a Contractor

Whereas traditional employees don’t have to think too much about Income Tax, contractors need to be on the ball from day one. From filing a Self-Assessment Tax Return to staying on top of VAT, there’s a fair amount for contractors to keep on top of, and you’re no exception. If you’re not tax-savvy, you run the risk of making a mistake. 


Understanding how tax works as a contractor isn’t just about staying compliant, it’s about maximising your take-home pay, avoiding HMRC penalties and making business decisions that drive business growth, rather than hold it back. This is why many contractors in the UK choose to work with a specialist accountant, such as limited company accountants, who understand the ins and outs of contracting. 


Paying Tax as a Contractor: How Taxes Work in the UK

When you’re working as a contractor, you need to handle your own taxes. Or, if not, you need to enlist a professional to do so on your behalf. You don’t have an employer to deduct Income Tax and National Insurance for you, and there’s no PAYE to fall back on. This means that you’re responsible for making sure the right taxes are calculated and paid.


The Taxes Contractors Need to Be Aware Of:

Here are some of the main taxes you need to be aware of as a contractor in the UK.


Income Tax

As a contractor, you need to pay Income Tax on all of your earnings. After deducting allowable expenses and your personal allowance, you will fall into one of three income bands. Depending on your earnings, you will pay a tax rate of 20%, 40% or 45%. 

National Insurance Contributions (NICs)

You will also need to pay NICs as a contractor. These are payments made to HMRC used to fund state benefits such as the State Pension. 

Corporation Tax

If you operate through a limited company, profits - after expenses and your salary have been dedicated - are subject to Corporation Tax, which you will need to pay as a contractor. The amount of Corporation Tax you pay depends on how much profit your limited company makes.

VAT (Value Added Tax)

Some contractors need to pay VAT.If your turnover exceeds £90,000, which is the current VAT threshold, you need to register for VAT. Some contractors register voluntarily to reclaim VAT on expenses, but not all. Whether you choose to register voluntarily for VAT depends on your business, earnings and clients.


The exact amount of Income Tax, NICs, Corporation Tax and VAT you have to pay depends on your earnings, the way your business operates and your business profits. But, by understanding what each payment is for, you’ll find it a lot easier to keep on top of your responsibilities as a contractor. After all, you don’t want to have any payment surprises.


Debunking Common Contractor Tax Myths

There’s a lot of misinformation out there about contractor taxes, but our experts are here to debunk them. By understanding the myths, you’ll find it a lot easier to manage your taxes as a contractor, as you’ll know exactly what you are liable for. 


All Business Expenses Are Deductible

Though a lot of business expenses are deductible, not every business expense can be claimed. 

You can claim legitimate business expenses, but they must be ‘wholly and exclusively’ for work purposes. Otherwise, they don’t qualify. For example, software subscriptions, professional insurance, equipment and certain travel costs often count. But, everyday personal spending can’t be counted. This means you can’t claim for lunches or clothes you want to wear on the weekend, nor can you claim expenses related to entertaining clients. To prove your expenses are for business use, you need to keep records and receipts. They don’t always ask, but HMRC can request proof if they want to, so it’s best to be organised.


I Need to Use a Contractor Accountant

There are a lot of contractors that do use accountants, but you don’t need to, not if you’re capable of handling everything yourself. There are benefits to hiring a professional accountant - for example, you can relax knowing everything is being handled by a professional, and you have more time to focus on building a business - but there’s nothing stopping you from handling everything yourself. 


IR35 Only Applies to Big Companies

You can’t afford to make mistakes when it comes to IR35 and the rules surrounding the legislation, and it’s not something that only applies to big businesses. IR35 applies to anyone providing services through an intermediary, like a limited company, regardless of business size. If HMRC decides that your contract looks more like employment than self-employment, you could find yourself faced with a big tax bill. You also risk missing out on many of the tax-efficient benefits of setting up a limited company. 


I Can Claim All My Meals and Travel as Business Expenses

Unfortunately, you can’t claim all of your meals and travel as business expenses, even if you’re a contractor with a limited company. If you have a daily commute to a regular client, you can’t claim this as a tax-deductible expense. Similarly, there are only certain circumstances when meals are allowable expenses, which means that most lunches and dinners don’t qualify. It’s easy to make a mistake with business expenses, but setting up a business bank account and keeping your expenses separate from personal spending helps.


Working Through a Limited Company is Always More Tax-Efficient

There’s a lot of reasons to set up a limited company for contracting, and tax-efficiency is one of them. But, a limited company isn’t a ‘one size fits all’ solution. The benefits of contracting through a limited company depends on your income, IR35 status and business circumstances. For some contractors, the administrative responsibilities outweigh the tax savings. But, for others, it’s the most tax-efficient way to work.


If I’m Paid in Cash, I Don’t Need to Declare It

Don’t make the mistake, as not declaring your earnings can land you in hot water. You need to declare all of your income to HMRC, even if you’re paid in cash. Though a lot of contractors prefer to keep payments electronic - as this tends to make tracking cash flow and income easier - you might find yourself with a client or two who wants to pay in cash. There’s nothing wrong with that, but you need to declare it as you could any other earnings.


Working With an Umbrella Company Doesn’t Impact My Take-Home Pay

If you’ve done any research into the various ways to contract, you’ve probably heard of umbrella companies. When you work with an umbrella company, you become an employee of that company. Though you can still operate as a contractor, you’re no longer classed as being self-employed. The umbrella company handles Income Tax and NICs on your behalf, deducting it at the source, making it a lot more convenient for you. However, you’ll have to pay fees for the service and there’s fewer expenses to claim, meaning that your take-home pay may be lower than if you worked through a limited company.


Whether you’re just starting out as a contractor or you’re in the process of building up a successful limited company, knowing that to expect from taxes is essential. At Go Limited, we know that contractor taxes can be daunting. There’s a lot to get your head around and there’s no ‘one size fits all’ tax solution. But, with a little bit of practice and help from our experts, you’ll understand your responsibilities in no time. 


accountant advising on IR35 compliance

FAQ's


What are the recent changes relating to contractors and tax in the UK?

The biggest shift has been the IR35 reforms. Since April 2021, medium and large private sector businesses have been responsible for deciding whether contractors fall inside or outside IR35. If inside, you’re taxed like an employee (PAYE), which usually reduces your take-home pay. For those working outside IR35, you can still benefit from the flexibility of paying through a limited company. Labour has hinted at further contractor tax reforms, so keeping informed is essential.


How much tax do I pay on £70,000 income as a contractor?

The exact tax depends on your working arrangement:

  • Limited company: You may pay yourself a low salary and the rest in dividends, which is often more tax efficient.
  • Umbrella company: You’re taxed like a regular employee under PAYE.
  • Sole trader: You’ll pay income tax and National Insurance on profits via Self-Assessment.

At £70,000, most contractors will pay a mix of basic (20%) and higher-rate (40%) tax. Dividends and expenses can reduce the bill if you work through a limited company.


How do contractors pay tax in the UK?

Contractors pay tax in different ways depending on their setup:

  • Limited company contractors pay Corporation Tax on company profits, and then personal tax on salary/dividends.
  • Umbrella contractors have tax and NI deducted before they receive payment.
  • Sole traders pay income tax and NI directly via Self-Assessment.


How can contractors minimise their taxes?

You can legally reduce your tax bill by:

  • Claiming business expenses (travel, training, equipment, software).
  • Making pension contributions, which reduce taxable income.
  • Using tax allowances (personal allowance, dividend allowance).
  • Splitting income with a spouse (if they’re a shareholder in your limited company).

Working with an accountant is the best way to stay compliant while maximising savings.


What is the tax rate for contractors in the UK?

Contractors follow the same income tax bands as employees:

  • 20% on income between £12,571 and £50,270.
  • 40% on income between £50,271 and £125,140.
  • 45% on income above £125,140.

In addition, contractors may pay National Insurance contributions and, if operating through a company, 25% Corporation Tax on profits.


Do self-employed contractors pay Corporation Tax?

No. Sole traders and self-employed contractors don’t pay Corporation Tax. Instead, they pay income tax on profits through Self-Assessment. Corporation Tax only applies if you run your own limited company.


Do independent contractors need a PAYE tax code?

Not usually. Independent contractors are generally responsible for their own tax, so they don’t receive a PAYE tax code unless they work through an umbrella company or are caught inside IR35. In those cases, a PAYE code will apply.


What happens if a contractor doesn’t provide tax details?

If a contractor refuses to provide tax details (like a UTR or company registration number), it creates compliance risks. Clients may need to deduct tax at source or refuse engagement. Always ensure you exchange the right paperwork, such as invoices and HMRC registration details, to avoid liability.


How does tax work for subcontractor payments?

Under the Construction Industry Scheme (CIS), contractors must deduct tax from payments made to subcontractors and pass it to HMRC. Subcontractors then receive credit for this tax against their annual return. Outside CIS, subcontractor payments are treated as normal business-to-business transactions, and tax responsibility stays with the subcontractor.


Does a limited company have to pay tax for subcontractors?

If you engage subcontractors through your limited company, you don’t directly pay their tax (except under CIS). They are responsible for declaring and paying their own taxes. However, you must keep records and ensure compliance with IR35 and employment law rules.


How will income tax be calculated for contractors inside IR35?

If you’re inside IR35, your income is taxed in the same way as an employee. This means:

  • Tax and National Insurance are deducted before you’re paid.
  • You don’t receive the same tax efficiencies as a limited company.
  • You also don’t get employment benefits (like holiday pay or pensions) unless through an umbrella.


Can contractors claim back tax?

Yes. Contractors can claim refunds if they’ve overpaid tax, for example:

  • Through PAYE under an umbrella.
  • If CIS deductions were too high.
  • If allowable expenses weren’t fully claimed.

Refunds can be requested via Self-Assessment or by contacting HMRC.


Which tax forms do independent contractors need?

Independent contractors usually need to complete a Self-Assessment tax return (SA100) each year. Limited company directors must also file Corporation Tax returns (CT600). CIS subcontractors may need to file additional paperwork to reclaim deductions.


How much time do contractors have to pay subcontractor tax?

Under CIS, contractors must submit monthly returns and pay deductions to HMRC by the 22nd of the following month (if paying electronically). Missing deadlines can lead to penalties and interest charges.


Do contractors pay more tax than employees?

Not necessarily.

  • Outside IR35 contractors may take home more by using dividends and expenses.
  • Inside IR35/umbrella contractors often pay tax similar to employees but without the benefits.

The overall tax efficiency depends on your working arrangement and over all income. 

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Speak to a Specialist

Important

 

Any rates and thresholds mentioned in this article are correct at the time of publishing and may be subject to change.

 

When choosing an accountant, look for one with proven experience and expertise in the contracting sector, particularly around areas like IR35, limited company tax matters and off-payroll working. Formal qualifications are important, but relevant hands-on knowledge matters just as much — especially in a complex and fast-changing landscape like this.

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