UK contractor tax glossary.

Plain-English definitions of the terms that appear on every NetRate calculator and guide. Verified against HMRC publications for the 2026/27 tax year.

IR35: HMRC legislation that determines whether a contractor working through their own Limited Company is, in tax terms, an employee of the end client. Inside IR35 means PAYE applies (usually via umbrella); Outside IR35 means the contractor keeps the Ltd company tax structure with salary plus dividends.
Outside IR35: A contractor engagement HMRC considers a genuine business-to-business arrangement. The contractor operates through a Limited Company, pays corporation tax on profit, and extracts income as salary + dividends. Tax-efficient versus PAYE but requires real business substance (right of substitution, control, no mutuality of obligation).
Inside IR35: A contractor engagement HMRC considers economically equivalent to employment. Income must flow through PAYE — typically via an umbrella company — with employer NI, employee NI, and income tax deducted at source. No dividend route, no corporation tax efficiency.
Dividend allowance: The first £500 of dividend income each tax year, tax-free. Cut from £2,000 (2022/23) to £1,000 (2023/24) to £500 (2024/25); unchanged for 2026/27. Important quirk: the allowance is tax-free but still uses up band space, so a basic-rate taxpayer using the full £500 still loses £500 of basic-rate band capacity for further dividends.
Personal allowance: The first £12,570 of income each tax year that is taxed at 0%. Frozen at this level until 2030/31 by the previous and current governments. Applied first against salary income, then other income types in a specific order. Tapers above £100,000 (see Personal Allowance Taper).
Personal allowance taper: For each £2 of adjusted net income above £100,000, the personal allowance reduces by £1. At £125,140 the PA reaches zero. This creates an effective marginal tax rate of 60% on income in the £100K–£125,140 band — one of the harshest rates in the UK tax system and a major planning consideration for contractors approaching £100K total income.
Dividend tax rates (2026/27): After the April 2026 rise: 10.75% basic rate (was 8.75%), 35.75% higher rate (was 33.75%), 39.35% additional rate (unchanged). The basic and higher rates rose by 2 percentage points. The £500 dividend allowance is unchanged.
Corporation tax rates (2026/27): 19% small profits rate (profits ≤ £50,000), 25% main rate (profits ≥ £250,000). Between £50K and £250K, marginal relief produces an effective rate that rises smoothly from 19% to 25% — but the marginal rate on profits in this band is 26.5% (yes, higher than 25% — by design, to claw back the small-profits relief).
Marginal relief: The formula HMRC uses to smooth corporation tax between the 19% small profits rate and the 25% main rate, for profits between £50,000 and £250,000. Formula: tax = 25% × profit − ((£250,000 − profit) × 3/200). The 3/200 fraction (= 1.5%) is the "marginal relief fraction".
Employer National Insurance: 15% on salary above the £5,000 secondary threshold (post-April-2025 rates). Paid by the employer (your Ltd company if you're a director). Corporation-tax-deductible, so the effective cost is lower than the headline rate. For a £12,570 director salary: (£12,570 − £5,000) × 15% = £1,136/year in employer NI.
Employee National Insurance: Class 1 NI deducted from your salary by your employer. For 2026/27: 8% on earnings between £12,570 and £50,270, 2% above. Applies to both director salaries (you pay it on your own salary) and umbrella workers.
Employment Allowance: An annual allowance of £10,500 that eliminates the first £10,500 of employer NI for qualifying companies. A Ltd company qualifies only if it has at least one employee who is not the sole director — solo Ltd companies are explicitly excluded. When available, it materially changes the optimal director salary calculation.
Umbrella margin: The umbrella company's fee for running PAYE on your behalf. Typical range: £15–£30 per week. The only legitimate fee an umbrella should charge — additional fees ("expenses processing", "holding back pay") are red flags for a non-compliant umbrella.
Assignment rate: The rate the agency pays the umbrella, after umbrella margin but before employer NI and apprenticeship levy. Distinct from your gross taxable salary, which is what remains after the umbrella subtracts employer NI and apprenticeship levy from the assignment rate.
Apprenticeship Levy: 0.5% tax on employer payroll, introduced 2017 to fund apprenticeship training. Most employers get a £15,000 allowance against it. Umbrella workers absorb this 0.5% via the assignment rate because the umbrella generally cannot apply the allowance to individual assignments.
JSL (Joint & Several Liability): New umbrella rules effective 6 April 2026. Recruitment agencies and end clients can now be held liable for unpaid PAYE and NI from non-compliant umbrellas in their supply chain. Practical effect: agencies have tightened which umbrellas they'll work with, and any umbrella claiming "tax-efficient pay" is now both a personal and an agency risk.
Director's loan account (DLA): A record of money flowing between you and your Limited Company outside of salary and dividends. When you owe the company (overdrawn DLA), HMRC charges s.455 tax at 33.75% if not repaid within 9 months of the period end. The post-April-2026 dividend rate rise has made most DLA strategies less attractive.
Members' Voluntary Liquidation (MVL): A solvent liquidation process that distributes a Limited Company's assets to shareholders as capital, attracting Capital Gains Tax (18% / 24%) plus potentially Business Asset Disposal Relief at 14% on the first £1M lifetime. Used to close a company tax-efficiently when retained profit exceeds the £25,000 informal-strike-off cliff.
Capital Gains Tax (CGT): Tax on the gain when you dispose of a chargeable asset. For 2026/27: 18% in the basic-rate band, 24% in the higher-rate band. Annual exempt amount: £3,000. Business Asset Disposal Relief applies a reduced 14% rate on the first £1M lifetime for qualifying business assets.
Director salary breakpoints: The four common salary levels considered for Limited Company directors: £0 (wastes PA), £6,708 (Lower Earnings Limit, free NI qualifying year), £9,100 (historic threshold, less relevant post-2025), £12,570 (full personal allowance, usually optimal for solo directors).