How are contractors paid in the UK?

6 min
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When IT contracting in the UK, the way in which you get paid depends on the way you are working as a technology professional.

Self-employed techie?

Those who are sole trader self-employed will invoice their clients directly and, because they will be taxed on their profits rather than drawings made from a business bank account, they need not worry about how and when they withdraw cash from their business.

But in this article, exclusively for Free-Work, my focus is on those tech contractors who operate through their own limited company – who will be paid as an employee/director and shareholder of the company.

As the limited company (LTD) is its own legal entity there are a few extra steps that need to be followed, which I’ll explain throughout, writes Christian Hickmott, managing director of Integro Accounting.

Getting paid as a contractor whose LTD – the basics

There are many reasons to contract through a limited company (also known as a Personal Service Company), most of which are often commercial. There can be, however, tax advantages to using a PSC/LTD.

Let’s imagine you’ve already set up a limited company and are the sole director and shareholder. Any contract for services will be between your client and your Ltd company (not you as an individual), therefore it’s your Ltd company that will invoice for the work.

So – to receive payment, the company will need to have its own business bank account. The money in the account belongs to your company and not yourself. It’s important to understand that any money withdrawn from the company will be treated as salary, a dividend, a repayment of expenses or as a director’s loan.

Ready to start taking a director’s salary?

In order to pay yourself a salary, there are a few steps you will need to follow.

First, you need to register your Ltd company with HMRC for Pay As You Earn (PAYE). HMRC will then create and send you your company PAYE references.

PAYE is the scheme set up by HMRC to allow employers to report payments of salaries and wages directly to HMRC, as well as calculating and paying any tax/NICs due on an employee’s salary.

Running payroll as a small limited company looks like this...

‘Running payroll,’ as it’s known, will involve:

-       Creating payslips,

-       Keeping records of the payments and any tax coding notices you may have received from HMRC, and;

-       Submitting RTI (Real Time Information) payroll returns to HMRC (N.B Often, this is either monthly or quarterly as you pay the salary.)

Bear in mind that even if you are drawing zero salary some months, you still need to make the monthly submission to HMRC (showing zero pay).

You may decide that you’d like an accountant to take this stress away from you and handle your payroll submissions - a decision we’d wholeheartedly endorse!

Best but least-taxing way to pay yourself as a limited company

Generally, you will be advised by your accountant to pay yourself a relatively low salary, so you can utilise your tax/NIC free allowances and, where needed, gain another qualifying year towards your state pension and other state benefits.

However, if you have other sources of income then it may be better to pay a lower salary or even not pay a salary at all for the time being, taking your overall income and tax banding into consideration. This is something that your accountant can advise on and is something that our practice does for our PSC clients, as standard, at the beginning and end of each tax year.

And as Free-Work readers will no doubt know, the 2023-24 tax year ends on April 5th 2023, and the 2024-25 tax year begins on April 6th 2024!

Whatever you decide, just remember that your salary is a tax-deductible expense for the company, so it will reduce the profits and corporation tax due to HMRC.


As a shareholder of your company you will also be able to pay yourself dividends. These can only be paid out of company profits after all liabilities and taxes have been taken into account.

If structured correctly, the mix of salary and dividends rather than just salary could see you increase your take-home pay and reduce your overall tax liabilities.

The two main advantages to paying dividends are the flexibility in when you are paid and second; that a dividend is not subject to national insurance.

What about a Director's Loan?

Proceed with caution! There are some benefits to borrowing funds from the company, mainly the low interest rate that you need to charge, but you must be prepared to deal with the potential tax consequences.

Where interest is paid below HMRC’s official rate you will be taxed on the additional interest that should have been paid. Depending on how long you have the loan, you may also have to pay additional corporation tax to HMRC.

If you are thinking of taking a loan from the company it is important that you discuss this with your accountant first to make sure you are aware of both the personal and corporation taxes that may be due.


So far, all of the above is based on the assumption that your contract is outside IR35 and so not subject to tax and NIC deductions as if it is all salary.

Before taking on any new contract you should make sure you are aware of its IR35 status. Where a contract has been arranged via an agency, it is common for the agency to have already appraised the contract and to advertise it as either Inside IR35 or Outside IR35. If they don’t, or if you cut out the agency and are direct-to-client for the assignment, you should ensure you take appropriate steps (including an IR35 status review) to ensure you treat the earnings correctly.

Where a contract does fall Inside IR35 (i.e. caught by IR35), it is often operated through an umbrella company (explained below), but it’s still quite common for IR35-caught jobs to be run through your limited company.

The main difference is that an Inside IR35 cases the end-client will deduct income tax and NICs as if you were an employee and pay this directly to HMRC. Where your client doesn’t do this, you will need to account for the tax and NICs and pay this to HMRC.

Getting paid when working through an umbrella company

Rather than working through your own limited company, you could work via an umbrella company. You would become an employee of the umbrella company who, as the employer, will be the party to invoice your end-client for the services you provide. The umbrella company is then responsible for paying your salary, as an employee, and deducting all tax and NI contributions.

This is a different way of contracting, and for some short-term contractors, or those offered a contract that’s Inside IR35, this could be a solution for them.

However, umbrella companies are not regulated, and umbrella company working does come with other pay-related disadvantages – the biggest being that it often means a lower take-home pay compared to working through your own LTD. The take-home pay differential is partly due to the NICs and Apprenticeship Levy due on your salary, but also due to the reduced flexibility in how you structure your remuneration. 

Final thoughts on getting paid as an IT contractor

As you can see -- for anyone starting their journey as a contractor the answer to how they should seek to remunerate themselves is very much, 'It Depends.' As mentioned above, there are many variables to consider: structure or set-up being the main determinant; then HMRC compliance and if LTD, salary-dividend split plus IR35 status.

To avoid overwhelm, reach out to a specialist in the industry before making a final decision - the best accountant will happily help you get started as a limited company but will just as readily introduce you to an umbrella company if not being a PSC would better suit your circumstances.

Written by

Christian Hickmott

Founder and CEO of Integro Accounting

Christian Hickmott has over 20 years of accountancy and working practice knowledge. He understands the wants and needs of contractors, having lead some of the largest accountancy firms in the business before founding Integro Accounting in 2013. A multi-award-winning brand based on integrity, trust and loyalty.

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