Quick Answer
Is it better to be PAYE or a limited company in the UK?
For most UK contractors earning above £50,000 and working outside IR35, operating through a limited company is typically more tax-efficient than PAYE. This is because profits can be taken as dividends, which are taxed at lower rates than salary and attract no National Insurance.
However, if you are inside IR35, the tax benefits are significantly reduced, and PAYE or umbrella employment may result in similar take-home pay. Use the calculator above to compare your specific figures.
The examples below use optimal director salary (£12,570), no expenses, and outside IR35 status. Click the income amounts in the calculator to model these exactly.
IR35 determines whether HMRC views your limited company work as genuine self-employment or disguised employment. Your position under IR35 can reduce your take-home by 20–30% on the same contract rate.
The calculator uses confirmed 2026/27 UK tax rates including income tax, National Insurance, dividend tax, and corporation tax with marginal relief. Results update instantly as you change any input.
20% / 40% / 45%Income tax bands
8% / 2%Employee NI
13.8%Employer NI
19% → 25%Corporation tax
10.75% / 35.75%Dividend tax
£12,570Personal allowance
£500Dividend allowance
Is a limited company better than PAYE in the UK?
In many cases yes — particularly for contractors outside IR35 earning above £50,000. A limited company director paying themselves a salary of £12,570 and taking the remainder as dividends typically pays significantly less tax than a PAYE employee on the same gross income. However, if you are inside IR35, the tax benefits are significantly reduced.
What is IR35 and how does it affect take-home pay?
IR35 is a UK tax rule that determines whether a contractor should be taxed like an employee. If you are inside IR35, your Ltd company income is treated as employment income, removing most tax advantages. Being inside IR35 can reduce your take-home by 20–30% compared to outside IR35 on the same contract rate.
How much tax do UK contractors pay in 2026/27?
This depends on IR35 status, income level, and expenses. Outside IR35 via a limited company, effective tax rates typically range from 20–35% on income between £50,000–£120,000. Inside IR35 or PAYE, effective rates range from 32–45% at the same income levels. Use the calculator above to see your specific figures.
Can I switch from PAYE to a limited company?
Yes — many UK contractors incorporate a limited company to reduce their tax bill. You should first check your IR35 status for existing contracts, consider admin responsibilities (annual accounts, confirmation statements, payroll), and compare the net saving against accountancy costs. AccTek can handle all of this from £19.99/month.
What is the optimal director salary for 2026/27?
For most sole-director companies, the optimal salary is £12,570 (equal to the personal allowance). This avoids income tax on the salary. As the only director you typically cannot claim Employment Allowance, so employer NI above £9,100 is a real cost. Some directors prefer £9,100 to eliminate employer NI entirely.
What are the dividend tax rates for 2026/27?
From 6 April 2026, dividend tax rates are: 10.75% for basic rate taxpayers, 35.75% for higher rate taxpayers, and 39.35% for additional rate taxpayers. The dividend allowance remains at £500 per year.
