£500/day outside IR35 via limited company: the full take-home, worked through line by line

The scenario

A UK contractor, let's call them Sam, has just landed a 12-month outside-IR35 contract at £500/day with a private sector medium/large client. Sam already has a Ltd company set up. Personal circumstances:

• Resident in England (rUK income tax bands apply to any salary income).
• Under State Pension Age (Class 1 NI applies).
• No student loan repayments outstanding.
• No pension contributions in this scenario (added as a sensitivity case at the bottom).
• Plans to take a £12,570 director salary plus the rest as dividends, the standard Ltd-director optimum.
• Working 220 days over the tax year (5 days/week × ~46 weeks, accounting for ~6 weeks of unbillable time).

All figures below use 2026/27 tax-year rates.

Step 1, Annual revenue

VAT-exclusive. If Sam is on the VAT Flat Rate Scheme at the 14.5% IT-contractor sector rate, there'd also be a small VAT-keep amount (~1-2% of turnover) but that's not modelled here.

Why 220 days? 5 working days × 52 weeks = 260 working days a year. Subtract a realistic 5 weeks of unpaid holiday (4 weeks discretionary + bank holidays equivalent) and a contingency week for sick days / unbillable downtime / contract gaps and you land at ~220. Every contractor calculator that uses 250 implicitly assumes you bill every working day with no leave, an unrealistic ~14% over-estimate.

Step 2, Director salary and employer NI

Sam pays themselves the standard £12,570 director salary, the personal allowance for 2026/27.

Employer NI in 2026/27 is 15% on earnings above the £5,000 secondary threshold. The £12,570 salary triggers £1,135.50 of employer NI, which the company pays to HMRC on top of the salary itself.

Why £12,570 specifically?Three things line up at exactly the personal allowance: (1) the salary is fully covered by Sam's 0% income-tax band (so no personal income tax), (2) the £12,570 NI primary threshold matches, so no employee Class 1 NI either, and (3) the company gets corporation tax relief on every pound of the salary at 22.5% effective rate (Sam is in the marginal- relief band at this profit level), which exceeds the 15% employer NI cost on the salary above £5,000. Net company saving versus a £0 salary strategy is about £1,253/year. See our salary vs dividend split optimiser for the full sweep.

Step 3, Operating costs

Sam uses a contractor-specialist accountant at £100/month for full bookkeeping, payroll, corporation tax filing, confirmation statement, and self-assessment. The £500 of other expenses covers professional indemnity insurance (~£250/year), IR35 insurance with Kingsbridge or Qdos (~£300/year, see our IR35 guide for the economics), software subscriptions, and small mileage claims for client visits.

Step 4, Pre-tax profit and corporation tax

£94,594.50 sits in the corporation tax marginal-relief band (£50,000 to £250,000 of profit), so the calculation is:

The marginal-relief mechanism smoothly raises the effective rate from 19% (at £50k profit) to 25% (at £250k). At Sam's profit level the effective rate is 22.5%. The marginal rate on each extra £1 of profit at this level is 26.5%, the highest effective marginal rate on a UK Ltd company.

Step 5, Distributable profit and dividends

Sam takes the full distributable profit as a dividend (the max-dividend strategy). In a more sophisticated approach Sam might retain some profit in the company to defer dividend tax to a lower-income future year, or extract it via a Members' Voluntary Liquidation later for capital gains treatment with Business Asset Disposal Relief at 10% , but that's out of scope for this base example.

Step 6, Personal tax on salary + dividends

Sam's total personal income for the year:

That's comfortably below the £100,000 personal- allowance taper threshold, so Sam keeps the full £12,570 personal allowance.

Income tax on salary

The personal allowance is allocated to the salary first (HMRC default for non-savings non-dividend income). Salary £12,570 minus PA £12,570 = £0 taxable salary → £0 income tax on salary.

Employee NI on salary

Class 1 employee NI in 2026/27 is 8% on earnings between £12,570 and £50,270 and 2% above. Sam's salary is at the £12,570 threshold exactly → £0 employee NI.

Dividend tax

With the PA fully used by salary, all £73,276.95 of dividends are taxable. The £500 dividend allowance applies at 0%, leaving £72,776.95 to be taxed at the dividend rates. Dividends stack on top of salary for band positioning, so:

The dividend rates (10.75% basic / 35.75% higher / 39.35% additional) are the post-Autumn-Budget-2025 figures — basic and higher rose by 2pp from 2025/26. See our dividend tax calculator for the per-band breakdown at any salary + dividend mix.

Step 7, Net to pocket

Sam keeps £69,129/year from a £110,000 revenue contract, about 62.8% retention. That's £5,761/month or £1,329/week of personal cash flow.

What changes if…

… Sam goes via umbrella instead (inside IR35)?

Same £500/day assignment rate, full PAYE on the umbrella side. Net to pocket: ~£65,519. Difference: −£3,610/year. The Ltd advantage at this day rate is real but not enormous, see the inside vs outside IR35 comparison for why this gap closes at very high day rates.

… Sam is in Scotland?

At the £12,570 salary the income tax is £0 in either region (full PA used). Dividend tax uses Westminster rates regardless of residence. The Ltd net is identical at this scenario: Scottish vs rUK only diverges when the salary itself is taxable.

… Sam has a Plan 2 student loan?

Student loans apply to total income (salary + dividends) for self-assessment purposes:

… Sam contributes £20,000 to a pension via the company?

Employer pension contributions are deductible expenses, so they reduce pre-tax profit (saves CT at the marginal-relief band's 26.5% effective marginal rate, about £5,300 of CT saving). The £20,000 doesn't count as personal income, so no income tax, no NI, no dividend tax. The calculation gets recursive (less profit → less dividend → less dividend tax) but the simple version: about £20,000 into pension at an effective ~£14,700 of personal cash-flow cost. Best tax move available to a Ltd director on a typical day rate.