Contractor Calculator
Your First Year Contracting: A 2026/27 Financial Checklist
The biggest financial mistakes contractors make happen in year one — not because contracting is complicated, but because nobody told them about payments on account, VAT registration deadlines, or why taking too much salary costs them thousands. Here’s what you need to do, in what order, with the actual numbers — so you don’t get a surprise tax bill in January.
See your take-home at your day rate →
First-year setup costs (rough estimate):
- Companies House registration: £50 (online)
- Business bank account: £0–£10/month
- Accountant setup: £200–£500
- Professional Indemnity insurance: £200–£500
- Accountancy (year 1): £1,200–£2,500
- Total before you bill a penny: ~£700–£3,500
Before you start: the setup checklist
1. Incorporate your limited company
Register at Companies House online — it takes 24 hours and costs £50. You’ll need:
- A company name (check availability at Companies House)
- A registered address (your home address is fine)
- At least one director (you) and one shareholder (you)
- A SIC code — for IT contractors: 62020 (IT consultancy) or 62090 (other IT services). For general management consulting: 70229.
Within a few days you’ll receive your Certificate of Incorporation and company number.
2. Register for Corporation Tax
HMRC automatically sends a CT41G form when your company is incorporated. Register for Corporation Tax online within 3 months of starting to trade — you’ll be fined if you don’t. Your accountant can do this for you.
3. Open a business bank account
Keep company money completely separate from personal money. Mixing them is one of the most common early mistakes. Most high-street banks offer free business accounts for the first year. Tide, Starling, and Monzo Business are popular no-fee options for contractors.
4. Register for PAYE (to pay yourself a salary)
Register as an employer with HMRC. This is free and takes about a week. You’ll need this in place before you pay yourself the first salary. Your accountant usually handles this.
5. Get Professional Indemnity insurance
Most agencies and end-clients require PI insurance before you can start. £1 million cover typically costs £200–£400/year for IT contractors. Arrange this before day one — contracts often require evidence of cover upfront.
6. Check whether you need to register for VAT
If your taxable turnover will exceed £90,000 in a 12-month rolling period, VAT registration is compulsory. At £500/day × 232 days = £116,000, you’ll need to register. Do this as soon as you expect to breach the threshold — late registration penalties apply.
Most contractors benefit from the Flat Rate Scheme (FRS), which simplifies VAT accounting. However, if you provide limited-cost services (most IT contractors do), the “limited cost trader” rate of 16.5% applies — meaning you charge 20% VAT but pay 16.5% to HMRC, keeping only 3.5%. Whether FRS benefits you depends on how much you spend on goods. Ask your accountant.
Month by month: year one
Month 1–2: first invoice, first salary
- Issue your first invoice including VAT (if registered)
- Set up monthly payroll and pay yourself £1,047.50/month (£12,570/12)
- Submit your first RTI (Real Time Information) return to HMRC on or before payday — your payroll software (FreeAgent, Xero) does this automatically
- Pay employer NI of £94.63/month to HMRC by the 22nd of the following month
Your take-home from salary alone is £1,047.50 — all of it, with no income tax or employee NI at this level.
Month 2–3: set aside tax reserves
From the moment money hits your company bank account, set aside a portion for tax. A good rule: put 25–30% of every invoice payment into a separate savings account. Label it “tax reserve.” Don’t touch it.
This covers Corporation Tax (19–25% of profits), dividend tax (10.75–35.75% of dividends), employer NI (already paying monthly), and VAT (if applicable).
If you’re on a £400/day rate, your first month’s gross might be £8,800 (22 billing days). Set aside £2,200–£2,640 immediately. The rest is available for salary, business costs, and eventually dividends.
Month 3–6: settle into rhythm
- Declare dividends monthly or quarterly — but only from distributable profits (accumulated profit after Corporation Tax). Don’t declare dividends if your accounts show you don’t have sufficient reserves.
- For each dividend: hold a brief board meeting (a written minute is sufficient), issue a dividend voucher, and transfer the funds to your personal account. See the step-by-step process →
- Keep all business receipts — accountancy fees, PI insurance, home office costs, professional subscriptions, equipment. Your accountant will need them.
Month 6: register for Self Assessment
If you’re not already registered, do this now. Registration takes up to 20 working days and HMRC must receive your Unique Taxpayer Reference before you can file. You’ll need Self Assessment to declare dividends, claim any outstanding tax relief, and pay the HICBC (if applicable).
Register at GOV.UK → “Register for Self Assessment.”
Month 9–12: approaching your first year-end
- Your company year-end is typically 12 months after incorporation, though you can change it
- Corporation Tax is due 9 months and 1 day after your accounting year-end — not when you file the return
- Start gathering records now: all invoices, all expenses, bank statements, dividend minutes
- Brief your accountant well in advance — year-end work is time-consuming and good accountants get busy
The tax timeline you must know
| Event | When |
|---|---|
| Monthly payroll (RTI) | On or before each payday |
| Employer NI payment | 22nd of the following month |
| VAT return (if quarterly) | One month + 7 days after quarter-end |
| Corporation Tax payment | 9 months + 1 day after company year-end |
| CT600 (company tax return) filing | 12 months after company year-end |
| Self Assessment registration deadline | 5 October after the tax year ends |
| Self Assessment filing deadline | 31 January following the tax year |
| Payments on account — WATCH THIS | 31 January and 31 July each year |
The payments on account trap
This catches almost every first-year contractor. When you file your first Self Assessment return (e.g., for 2026/27 on 31 January 2028), HMRC doesn’t just collect what you owe for that year. They also demand two “payments on account” — advance payments toward the following year’s tax — each equal to 50% of your current bill.
Example: Your Self Assessment bill for 2026/27 is £18,000. On 31 January 2028 you pay:
- £18,000 (the 2026/27 bill)
- £9,000 (first payment on account for 2027/28)
- Total due: £27,000
Then on 31 July 2028: another £9,000.
If you weren’t expecting this, and you’ve spent your tax reserve on dividends, this is a serious problem. Build payments on account into your reserves from year one. Once you’ve been through a full cycle, you’ll have the timing down — but year one is where people get caught.
Common first-year mistakes
Taking too much salary
Every pound of salary above £12,570 costs 20% income tax + 8% employee NI + 15% employer NI = 43% in deductions. Dividends up to £50,270 cost 10.75%. Keep salary at £12,570.
Declaring dividends without sufficient reserves
If you declare dividends that exceed your company’s distributable profits, they become “unlawful dividends” that must be repaid. Always check your profit position first.
Ignoring the VAT threshold
Missing the £90,000 threshold and registering late results in penalties and potential interest on backdated VAT. Monitor your rolling 12-month turnover monthly.
Not claiming the Employment Allowance
Single-director companies where the director is the only employee are not eligible. But if you bring on another employee (including a spouse on payroll), you may become eligible for the £10,500 allowance, which offsets employer NI.
Forgetting to save for tax
The instinct when money arrives in your company account is to pay yourself. Resist it. The tax will come due whether or not you’ve saved for it.
Useful first-year tools
| What you need | Where to go |
|---|---|
| See your take-home at your day rate | Compare Structures Calculator |
| Find the right day rate for your target | Day Rate Calculator |
| Model the optimal salary/dividend split | Dividend vs Salary Calculator |
| Check your IR35 status | IR35 Status Check |
| Plan monthly income | Monthly Income Estimator |
Frequently asked questions
Do I need an accountant as a contractor?
Yes, in practice — even though it’s not legally required. A good contractor accountant (£1,200–£2,500/year) handles Corporation Tax, payroll, Self Assessment, VAT, and dividend compliance. The time they save and mistakes they prevent are worth far more than the fee. Look for one with experience specifically in PSC (Personal Service Company) work.
When can I start paying myself dividends?
Once your company has distributable profits — accumulated profit after Corporation Tax. In practice, this means after you’ve invoiced your first clients and the money has arrived. You can’t declare dividends until your company has made a profit; in the early weeks, your company may have only salary costs, so wait until the profit position is clear.
What’s the most tax-efficient way to extract £50,000 from my company?
Take £12,570 as salary (£0 income tax, £0 employee NI, £1,136 employer NI) and the remainder as dividends. On £50,000 extracted this way, your total personal tax bill is approximately £3,999 (dividend tax at 10.75% on ~£37,200). Compare that to taking £50,000 as salary: you’d pay roughly £12,500 in income tax and NI. Model your exact split →
Should I use FreeAgent, Xero, or QuickBooks?
FreeAgent is most popular with UK contractors — it’s specifically designed for the PSC model, handles payroll, VAT, and dividends well, and integrates with most business bank accounts. Xero is more powerful if your accountant prefers it. QuickBooks is solid but less contractor-specific. Many accountants offer FreeAgent as part of their package — check before subscribing independently.
What insurance do I actually need?
At minimum: Professional Indemnity insurance (£200–£500/year, required by most agencies). If you visit client sites, Public Liability insurance is also expected. You’re not legally required to have Employer’s Liability unless you have actual employees — if you’re the sole director and employee, check with an insurance broker. All insurance premiums are deductible company expenses.
About to start contracting? Run your day rate through our Compare Structures calculator to see what you’ll actually take home — and use the Day Rate Calculator if you’re still working out what to charge.