At £400/day (220 days, £88,000/year revenue), a limited company contractor takes home £4,937/month — £390/month (£4,680/year) more than umbrella. This is the point where many experienced contractors firmly commit to running their own limited company, and where pension contributions begin to offer compelling additional savings.
Take-Home Comparison — £400/Day
| Ltd Company | Umbrella | PAYE | |
|---|---|---|---|
| Annual revenue | £88,000 | £88,000 | £88,000 |
| Gross personal income | £12,570 salary + £56,151 dividends | £75,870 salary | £77,174 salary |
| Income tax | £0 salary; £9,482 dividend tax | £17,780 | £18,302 |
| National Insurance | £0 (employee) | £3,528 | £3,554 |
| Monthly take-home | £4,937 | £4,547 | £4,610 |
| Annual take-home | £59,239 | £54,562 | £55,318 |
Ltd Company Calculation (Outside IR35)
Annual revenue: £88,000
- Director salary: −£12,570
- Employer NI: −£1,136
- Ltd expenses: −£3,000
- Taxable profit: £71,294
Corporation tax (marginal relief): CT = 25% × £71,294 − (£250,000 − £71,294) × 3/200 = £17,824 − £2,681 = £15,143 (effective rate: ~21.2%)
Profit after CT: £56,151
Dividends:
- £500 at 0% = £0
- £37,200 at 8.75% = £3,255
- £18,451 (above £50,270 total income) at 33.75% = £6,227
- Total dividend tax: £9,482
Take-home: £12,570 + £56,151 − £9,482 = £59,239/year = £4,937/month
Umbrella Company Calculation (Inside IR35)
Revenue after umbrella margin: £86,500 Gross salary: (£86,500 + £750) ÷ 1.15 = £75,870
| Earnings | Rate | Tax |
|---|---|---|
| £12,571–£50,270 | 20% | £7,540 |
| £50,271–£75,870 | 40% | £10,240 |
| Total income tax | £17,780 |
Employee NI: (£37,700 × 8%) + (£25,600 × 2%) = £3,016 + £512 = £3,528
Take-home: £75,870 − £17,780 − £3,528 = £54,562/year = £4,547/month
PAYE Calculation
Gross salary: (£88,000 + £750) ÷ 1.15 = £77,174
- Income tax: £18,302
- Employee NI: £3,554
- Take-home: £55,318/year = £4,610/month
Pension Strategy at £400/Day
At £400/day, significant dividends (£18,451) fall in the 33.75% higher rate band. A company pension contribution eliminates this exposure and attracts CT relief:
| Annual pension | Take-home (personal) | Tax saving | Net pension cost |
|---|---|---|---|
| £5,000 | £58,064/year | £1,061 + £1,250 CT = £2,311 | £2,689 |
| £10,000 | £57,390/year | £2,500 + £2,120 CT = £4,620 | £5,380 |
| £18,451 | £55,841/year | Full higher rate removed: £7,808 | £10,643 |
Contributing £18,451 in company pension eliminates all dividend higher rate exposure, saving £4,613 in dividend tax, plus attracts ~£3,912 CT relief. The pension grows by £18,451; your company pays effectively £10,643 for that contribution.
Worked Example — Rachel, Senior Scrum Master
Rachel contracts at £400/day (outside IR35) as a senior Scrum Master in financial technology. Annual revenue: £88,000.
Annual company accounts:
- Revenue: £88,000
- Salary + employer NI: £13,706
- Expenses: £3,000
- Company pension (annual): £12,000
- Pre-CT profit: £59,294
- CT (marginal relief, effective ~20.9%): £12,402
- Available for dividends: £46,892
Rachel’s income:
- Salary: £12,570
- Dividends: £46,892 (just below higher rate threshold: tax = £37,200 × 8.75% − £500 allowance) = £3,240
- Monthly take-home: £4,685
- Company pension: £12,000/year accumulating
Without pension, take-home = £4,937/month with higher rate dividend tax. With £12,000 pension, take-home = £4,685/month but she accumulates £12,000/year at an effective cost of £9,038 — an exceptional retirement saving rate.
IR35 and the £400/Day Contractor
At £400/day (c.£88,000/year gross), the tax difference between inside and outside IR35 is substantial — typically £15,000–£20,000 per year. Most contractors at this rate structure their contracts carefully to support outside-IR35 status through:
- Substitution clauses — the right to send a replacement to do the work
- Control evidence — operating independently, setting own hours, using own equipment
- Multiple clients — not being financially dependent on one client
- IR35 review — obtaining a formal contract review from a specialist (cost: £200–£500)
The saving from maintaining outside-IR35 status at £400/day is large enough to justify professional advice on contract structure and working practices.