Methodology · 2026/27

How every number is calculated

This page documents the full calculation chain behind the contractor take-home calculator — every rate, formula and simplifying assumption. Rates were last verified on 12 June 2026 against the GOV.UK and gov.scot sources listed at the end.

Shared foundations

All three computations start from gross billings B = day rate × days worked. The personal allowance is £12,570, reduced by £1 for every £2 of income above £100,000 (fully gone at £125,140). Band thresholds are published including the standard allowance; the engine converts them to taxable-income limits so the taper interacts correctly — the detail most calculators get wrong between £100,000 and £125,140.

Income tax bands (2026/27)

England, Wales & Northern Ireland
Total income up to	Rate
£50,270	20%
£125,140	40%
No limit	45%

Scotland (set January 2026)
Band	Total income up to	Rate
Starter	£16,537	19%
Basic	£29,526	20%
Intermediate	£43,662	21%
Higher	£75,000	42%
Advanced	£125,140	45%
Top	No limit	48%

National Insurance and dividend tax are not devolved: Scottish taxpayers use Scottish bands for salary income only; dividends and NI always use UK-wide figures.

National Insurance (2026/27)

Employee: 8% between £12,570 and £50,270, 2% above — computed on an annual basis (directors' method).
Employer: 15% above the £5,000 secondary threshold.
Apprenticeship levy: 0.5% (see umbrella assumptions below).

Student loans (2026/27 thresholds)

Plan	Annual threshold	Rate
Plan 1	£26,900	9%
Plan 2	£29,385	9%
Plan 4	£33,795	9%
Postgraduate	£21,000	6%

A. Umbrella (PAYE through an umbrella company)

Assignment income B.
Less the umbrella margin × 52 — the margin is charged weekly regardless of days actually worked (assumption).
Less employer NI and apprenticeship levy unwound from the rate. Both are charged on gross pay above the £5,000 secondary threshold, so gross pay solves A = g + 0.15·(g − 5,000) + 0.005·(g − 5,000), giving g = (A + 5,000 × 0.155) / 1.155. The engine's test suite asserts the round-trip reconstructs the assignment income to within £1.
Less employer pension via salary sacrifice (your % × gross pay, capped at the £60,000 annual allowance).
Income tax on the remaining gross (regional bands, PA taper).
Employee NI (8%/2%).
Student loan if selected.

Stated assumptions: the levy is modelled on the same base as employer NI (in law it is 0.5% of the umbrella's whole pay bill less a £15,000 allowance — for a large umbrella the allowance is exhausted and the difference is at most ~£25/year). The pension sacrifice is applied after the employer-cost unwind; umbrellas that sacrifice before employer NI will show slightly higher pension and net figures. Holiday pay is assumed rolled up into the rate.

B. Limited company, inside IR35 (deemed payment)

Modelled identically to the umbrella chain with no margin: the fee-payer deducts employer NI and the levy before paying your company, then PAYE applies. The 5% expenses allowance is ignored — it was abolished where the client determines status, which covers nearly all engagements since 2021. No expenses relief applies.

C. Limited company, outside IR35

Company revenue B, less your allowable expenses input.
Less director salary, fixed at £12,570 — the optimum for a sole director in 2026/27: it equals both the personal allowance and the employee-NI primary threshold, so carries no personal tax, while remaining an allowable company expense.
Less employer NI on the salary: 15% × (£12,570 − £5,000) = £1,135.50. Sole-director companies cannot claim the Employment Allowance.
Less employer pension contribution (your % × billings, capped at £60,000 and flagged if capped).
Corporation tax on the resulting profit: 19% up to £50,000, 25% from £250,000, marginal relief between: CT = 25% × profit − (250,000 − profit) × 3/200.
All post-tax profit is extracted as dividends in the same year (assumption: full extraction, single director, no other income). Dividend tax: £500 allowance at 0% (it still consumes band), then 10.75% in the basic band, 35.75% in the higher band and 39.35% above £125,140 — the rates that rose two points on 6 April 2026. Dividends sit on top of salary, and the PA taper is applied to total income, so above £100,000 the salary itself starts to attract tax.
Student loan on total income (salary + dividends) via Self Assessment.

What the model deliberately ignores

VAT (flat-rate scheme gains/losses are out of scope).
Retained profit strategies, multiple shareholders, spouse dividends.
Other personal income (rental, savings, investments).
HMRC pay-period rounding conventions — we compute to the penny on an annual basis.
Umbrella holiday-pay accrual mechanics, expenses chargeable through umbrellas.
Pension carry-forward above the £60,000 annual allowance.

Sources

The engine is open about its working: every rate lives in a single version-controlled rates file, the test suite encodes HMRC worked examples (including the £125,140 = £42,516 figure and the 2026/27 dividend-rise scenario), and five full scenarios are documented with line-by-line breakdowns for independent checking.

Last reviewed 12 June 2026 · By toolseveryday Editorial Team — Researching and verifying UK contractor tax figures against HMRC guidance.