TaxRateHub Glossary: 50+ UK Contractor Tax Terms (2026/27)

IR35

IR35 (the off-payroll working rules) is UK tax legislation that determines whether a contractor is a genuine business or a disguised employee for tax purposes. If your contract is inside IR35, HMRC treats your income as employment income taxed via PAYE. If outside IR35, you operate through your limited company and pay corporation tax and dividends. The rules were reformed in 2017 (public sector) and 2021 (private sector), placing the determination responsibility on the end client for medium and large organisations.

Outside IR35

Outside IR35 means HMRC accepts you as a genuine business operating through your own limited company. You pay corporation tax on retained profits, extract income via salary and dividends, and can claim allowable business expenses. Outside IR35 contractors typically take home 20-30% more than inside IR35 contractors at the same day rate, due to the tax efficiency of dividends over PAYE income.

Inside IR35

Inside IR35 means HMRC deems you an employee for tax purposes, even though you work through an intermediary. Your contract income is treated as employment income, with income tax, employee NI, and employer NI deducted via PAYE. Inside IR35 contractors cannot claim travel and subsistence expenses and have restricted tax planning options compared to outside IR35 contractors.

Deemed Employment

Deemed employment is the legal concept that a contractor who would be an employee if engaged directly is treated as an employee for tax purposes. This triggers the deemed payment calculation, where income tax, employee NI, and employer NI are deducted from the contract value before the contractor is paid. Deemed employment applies only for tax purposes and does not automatically confer employment rights.

Status Determination Statement (SDS)

A Status Determination Statement (SDS) is a written assessment from the end client that sets out whether a contract falls inside or outside IR35 and the reasons for that decision. Medium and large private-sector clients and all public-sector clients are legally required to provide an SDS before the contract begins. The contractor and fee-payer must be given a copy, and there is a formal disagreement process if the contractor disputes the determination.

Supervision, Direction or Control (SDC)

Supervision, Direction or Control (SDC) is a key IR35 status test. If the client has the right to supervise how you work, direct what work you do, or control when and where you do it, your contract is more likely to be inside IR35. Outside IR35 contractors typically have significant autonomy in how they deliver their work, with the client interested only in the final output or result.

Substitution

Substitution is the right to send a replacement worker to perform the contract in your place. A genuine, unfettered right of substitution is a strong indicator of outside IR35 status. If the contract requires you to perform the work personally, this suggests inside IR35. HMRC examines whether the substitution right is realistic and commercially feasible, not just whether it appears in the contract.

Mutuality of Obligation (MOO)

Mutuality of Obligation (MOO) is a key IR35 test that asks whether the client is obliged to offer work and whether the contractor is obliged to accept it. Outside IR35 contracts typically lack MOO — the contractor can refuse work and the client has no obligation to provide it. Inside IR35 arrangements usually have MOO, meaning the client must provide work and the contractor must perform it.

Financial Risk

Financial risk is an IR35 indicator that looks at whether the contractor bears commercial risk. Outside IR35 contractors typically carry financial risk: they invoice for work done, may need to rectify defects at their own cost, provide their own equipment, and have no entitlement to holiday or sick pay. Inside IR35 contractors face minimal financial risk as they are paid like employees regardless of profitability.

Umbrella Company

An umbrella company is an intermediary employer that employs contractors on behalf of end clients. They handle payroll, income tax, NI, pension auto-enrolment, and student loan deductions. The umbrella charges a weekly margin (typically £20-30) for their services. Umbrella employment is treated as inside IR35 for tax purposes, meaning you pay income tax and NI through PAYE on the full contract value.

Limited Company

A limited company is a separate legal entity owned by contractors who operate outside IR35. The company receives contract income, pays corporation tax on profits (19-25% for 2026/27), and the contractor extracts income via salary and dividends. Running a limited company offers greater tax efficiency but comes with administrative responsibilities including filing annual accounts, corporation tax returns, and company confirmation statements.

Umbrella Margin

The margin is the fee charged by an umbrella company for processing payroll and managing employment obligations. Margins typically range from £20-30 per week. Some umbrella companies also charge joining fees, exit fees, or weekly administration charges. Always check the total margin and any additional fees before signing up, as these directly reduce your net take-home pay.

PAYE

Pay As You Earn (PAYE) is the system HMRC uses to collect income tax and National Insurance from employment income. Employers deduct tax and NI before paying employees. Inside IR35 contractors and umbrella workers are paid through PAYE, with deductions calculated on each payment based on their tax code and cumulative earnings.

Employer National Insurance

Employer National Insurance is a tax paid by the employer (or the fee-payer in an IR35 context) on the employee earnings. For 2026/27, employer NI is 15% on earnings above £5,000 per year. In inside IR35 contracts, this is deducted from the contract value before the contractor receives their pay, significantly reducing the net amount available.

Employee National Insurance

Employee National Insurance is deducted from employment income through PAYE. For 2026/27, the rates are 8% on earnings between £12,570 and £50,270 per year, and 2% on earnings above £50,270. Inside IR35 and umbrella workers pay employee NI on their full contract income, while outside IR35 contractors can minimise NI by taking a lower salary and extracting profits as dividends.

Personal Allowance

The personal allowance is the amount of income you can earn each tax year without paying income tax. For 2026/27, the personal allowance is £12,570. It is reduced by £1 for every £2 of income above £100,000, meaning it is fully withdrawn at £125,140. This creates an effective 60% marginal tax rate on income between £100,000 and £125,140.

Basic Rate Income Tax

The basic rate of income tax for 2026/27 is 20%, applying to taxable income between £12,571 and £50,270. This applies to employment income (PAYE), pension income, rental income, and sole trader profits. Scottish taxpayers have different bands and rates, with no direct equivalent of the UK basic rate band.

Higher Rate Income Tax

The higher rate of income tax for 2026/27 is 40%, applying to taxable income between £50,271 and £125,140. In Scotland, the higher rate is 42% and applies above £31,092. Dividend income above the allowance is also taxed at a higher rate for higher-rate taxpayers (33.75% for dividends in 2026/27).

Additional Rate Income Tax

The additional rate of income tax for 2026/27 is 45%, applying to taxable income above £125,140. In Scotland, the top rate is 48% and applies above £62,570. Additional-rate taxpayers also pay the highest dividend tax rate of 39.35% and lose their personal allowance entirely.

Scottish Starter Rate

The Scottish Starter Rate is 19% and applies to the first £2,306 of taxable income above the personal allowance for 2026/27. This is unique to Scotland — no equivalent exists in England, Wales, or Northern Ireland, where the basic rate of 20% starts immediately above the personal allowance.

Scottish Basic Rate

The Scottish Basic Rate is 20% and applies to taxable income between £2,307 and £13,991 for 2026/27. Despite being called the basic rate, it is only the second of five Scottish income tax bands. Scottish contractors pay this rate on a smaller portion of their income than the UK basic rate covers.

Scottish Intermediate Rate

The Scottish Intermediate Rate is 21% and applies to taxable income between £13,992 and £31,091 for 2026/27. This band has no equivalent in the rest of the UK, where the 20% basic rate applies up to £50,270. The intermediate rate adds approximately £300-500 in tax for Scottish contractors compared to the UK system.

Scottish Higher Rate

The Scottish Higher Rate is 42% and applies to taxable income between £31,092 and £62,570 for 2026/27. This is significantly higher than the UK higher rate of 40% and starts at a much lower threshold (£31,092 vs £50,270). This means Scottish contractors pay substantially more income tax than equivalent contractors in England.

Scottish Top Rate

The Scottish Top Rate is 48% and applies to taxable income above £62,570 for 2026/27. This is higher than the UK additional rate of 45% and kicks in at a much lower threshold (£62,570 vs £125,140). Scottish contractors earning over £62,570 pay significantly more income tax than equivalent contractors in England.

Corporation Tax

Corporation tax is a tax on company profits for limited companies. For 2026/27, the rate is 19% for profits up to £50,000, 25% for profits over £250,000, with marginal relief applied between these thresholds. Outside IR35 contractors pay corporation tax on their company retained profits before extracting dividends. The effective marginal rate between £50,000 and £250,000 is 26.5%.

Dividend Tax

Dividend tax is charged on dividend income above the annual allowance. For 2026/27, the dividend allowance is £500. Dividend tax rates are 8.75% (basic rate), 33.75% (higher rate), and 39.35% (additional rate). Dividends within the allowance are tax-free regardless of your tax band. Dividends do not count as earnings for pension or student loan purposes.

Dividend Allowance

The dividend allowance is the amount of dividend income you can receive each tax year without paying dividend tax. For 2026/27, the allowance is £500 (reduced from £1,000 in 2024/25 and £2,000 in 2023/24). Dividends above this threshold are taxed at your applicable dividend tax rate. The allowance applies per individual, so spousal shareholding can double the household tax-free amount.

Marginal Relief (Corporation Tax)

Marginal relief is a gradual tapering of corporation tax rates between the small profits rate (19%) and the main rate (25%). For 2026/27, it applies to companies with profits between £50,000 and £250,000. The effective marginal rate within this band is 26.5%, creating a gradual transition between the two rates rather than a sharp cliff edge.

Auto-Enrolment

Auto-enrolment is a workplace pension scheme that employers must offer to eligible workers. For inside IR35 and umbrella contractors, the employer must automatically enrol you and contribute at least 3% of qualifying earnings. You can opt out, but this means forfeiting the employer contribution. Total minimum contributions are 8% (5% employee, 3% employer).

Salary Sacrifice

Salary sacrifice is an arrangement where an employee gives up part of their salary in exchange for a non-cash benefit, most commonly increased pension contributions. For inside IR35 contractors, salary sacrifice reduces both income tax and employee NI. It is one of the most tax-efficient ways to save for retirement, saving up to 8% in NI plus income tax at your marginal rate.

SIPP (Self-Invested Personal Pension)

A Self-Invested Personal Pension (SIPP) gives you control over where your pension contributions are invested. Contractors can contribute up to £60,000 per year (2026/27) and receive tax relief at their marginal rate. Limited company contractors can also make employer contributions to their SIPP as a business expense, reducing corporation tax liability.

Student Loan Plan 1

Student Loan Plan 1 applies to students who started before 1 September 2012 in England and Wales (or before 2007 in Scotland). Repayments are 9% of income above £2,274 per month (£27,288 per year). Interest is capped at the lower of RPI inflation or the Bank of England base rate plus 1%. The loan is written off after 25 years.

Student Loan Plan 2

Student Loan Plan 2 applies to students starting between 1 September 2012 and 31 July 2023 in England and Wales. Repayments are 9% of income above £1,834 per month (£22,008 per year). Interest rates vary by income, ranging from RPI to RPI plus 3%. The loan is written off after 30 years.

Student Loan Plan 4

Student Loan Plan 4 applies to Scottish students who started after 1998 and before 1 August 2023. Repayments are 9% of income above £2,364 per month (£28,368 per year). Interest is set at the lower of RPI or the Bank of England base rate plus 1%. The loan is written off after 30 years.

Student Loan Plan 5

Student Loan Plan 5 applies to English students starting on or after 1 August 2023. Repayments are 9% of income above £1,834 per month (£22,008 per year). Interest is set at RPI only. The repayment period is 40 years (compared to 30 years for older plans). Dividends outside IR35 do not attract student loan deductions.

Apprenticeship Levy

The apprenticeship levy is a charge of 0.5% on an employer total pay bill, applied only when the pay bill exceeds £3 million per year. In practice, inside IR35 and umbrella contract values may show an apprenticeship levy deduction as a line item, even though the levy technically applies to the employer overall pay bill rather than individual contracts.

CIS (Construction Industry Scheme)

The Construction Industry Scheme (CIS) is a tax deduction system for the UK construction industry. Contractors in the scheme deduct 20% from subcontractor payments and pay this directly to HMRC. Subcontractors can claim back any overpaid CIS tax through their annual Self Assessment tax return. The deduction acts as a prepayment of the subcontractor tax liability.

R&D Tax Credits

Research and Development (R&D) Tax Credits reward UK companies for investing in innovation in science and technology. For 2026/27, the SME scheme offers up to 27% payable credit on qualifying R&D expenditure. Qualifying costs include staff wages, software licences, consumables, and externally provided workers. The RDEC scheme for large companies offers a 15% taxable credit.

Capital Gains Tax (CGT)

Capital Gains Tax is charged on the profit when you sell or dispose of an asset that has increased in value. For 2026/27, residential property gains are taxed at 18% (basic rate) and 24% (higher rate). The annual exempt amount is £3,000. Other assets are taxed at 10% and 20%. Private Residence Relief can fully exempt gains on your main home.

CGT Annual Exempt Amount

The Capital Gains Tax annual exempt amount is the amount of gains you can realise in a tax year without paying CGT. For 2026/27, this is £3,000 for individuals (reduced from £6,000 in 2024/25 and £12,300 in 2022/23). Married couples and civil partners each have their own allowance, effectively doubling the tax-free amount to £6,000 per household.

Flat Rate VAT Scheme

The Flat Rate VAT Scheme simplifies VAT accounting for businesses with turnover up to £150,000. Instead of calculating input and output VAT, you apply a flat percentage to your gross turnover. For 2026/27, the applicable flat rate depends on your business sector. Limited company contractors often use this scheme as it can simplify VAT administration significantly.

Mileage Allowance

The mileage allowance is the rate at which contractors can claim tax relief for business travel. For 2026/27, the approved mileage allowance payment (AMAP) rate is 45p per mile for the first 10,000 business miles and 25p per mile thereafter. Limited company contractors outside IR35 can claim this through their company as an allowable business expense.

Home Office Allowance

The home office allowance covers the cost of working from home. For 2026/27, contractors can claim £6 per week (£312 per year) without needing receipts, or claim actual costs (proportion of heating, electricity, internet) with detailed records. Limited company contractors can claim this as a business expense, reducing corporation tax liability.

Employment Allowance

The employment allowance is a £5,000 annual reduction in employer National Insurance contributions available to businesses with employer NI bills below £100,000 per year. It cannot be claimed for deemed employment payments on IR35 contracts, but limited company contractors with employees (including themselves on payroll) may qualify for this relief.

HMRC

His Majesty Revenue and Customs (HMRC) is the UK government department responsible for tax collection, customs, and enforcing tax laws. HMRC administers income tax, National Insurance, corporation tax, VAT, and other levies. They also conduct tax investigations and enquiries into taxpayer compliance, including targeted IR35 reviews of contractor arrangements.

Tax Enquiry

A tax enquiry (or tax investigation) is a review by HMRC of a taxpayer affairs to ensure compliance with tax laws. HMRC can typically review the last 4-6 years of returns. Common triggers include industry-wide campaigns, income inconsistencies, unusual expense claims, and random selection. Professional representation is strongly recommended during an enquiry.

IR35 Investigation

An IR35 investigation is a targeted HMRC review of a contractor IR35 status across multiple contracts. HMRC can review up to 6 years of contract history. If they determine you should have been inside IR35, you may owe back taxes, interest, and penalties. The cost of an investigation can be substantial, making professional representation a worthwhile investment.

Take-Home Pay

Take-home pay is the net income a contractor receives after all deductions including income tax, National Insurance, pension contributions, student loan repayments, and other deductions. Outside IR35 contractors typically have higher take-home pay than inside IR35 contractors at the same contract rate due to dividend tax efficiency and lower overall NI burden.

Gross Income

Gross income is the total contract value before any deductions. For contractors, this is typically the day rate multiplied by the number of working days per year. Gross income does not reflect what the contractor actually receives — it is the starting point from which all tax and NI deductions are calculated based on the employment status.

Net Income

Net income (or net pay) is what the contractor actually receives after all deductions. For outside IR35 contractors, net income is the salary plus dividends received from the limited company after corporation tax. For inside IR35 and umbrella workers, net income is the amount received after PAYE deductions including tax, NI, and pension contributions.

Self Assessment

Self Assessment is HMRC system for collecting tax from individuals who do not have all their tax deducted at source. Contractors typically need to file a Self Assessment tax return each year, reporting income from their limited company, dividends, and any other income. The deadline for online returns is 31 January following the end of the tax year.

Deemed Payment

The deemed payment is the inside IR35 tax calculation that determines how much tax and NI must be paid on a contract. It starts with the gross contract value, subtracts allowable expenses (5% of the gross for administrative costs), then calculates employer NI (15%), the apprenticeship levy (0.5%), employee NI (8%/2%), and income tax (20/40/45%). The remaining amount is the contractor net pay.

CIS Deduction

The CIS deduction is the 20% withholding applied to payments made to subcontractors under the Construction Industry Scheme. The contractor (main contractor or agency) deducts this from the subcontractor payment and pays it to HMRC. The subcontractor can claim this back through their Self Assessment tax return if their total tax liability is less than the amount deducted.

Rate Uplift

A rate uplift is the higher day rate needed when a contract moves from outside IR35 to inside IR35 or through an umbrella company. The uplift compensates for the additional tax and NI deductions. Typical uplifts range from 20-35%, depending on the day rate, pension contributions, student loan status, and location (Scottish contractors need higher uplifts due to higher tax rates).

Worker Rights Under IR35

Inside IR35 contractors are deemed employees for tax purposes but do not automatically gain employment rights such as unfair dismissal, redundancy pay, or statutory sick pay. Umbrella workers, as employees of the umbrella company, have full employment rights including holiday pay, sick pay, and parental leave. The distinction between tax status and employment rights is an important consideration when choosing your working arrangement.