Working as an IT contractor in the UK gives you genuine flexibility —
over your clients, your schedule and, to a meaningful degree, your
income. But it also places a set of structural and compliance decisions
in your hands that employees never face. The choices you make around
your trading structure, IR35 status and expenses strategy compound
significantly across a contract year.
This guide covers how accounting for contractors actually works in
2026–27: the limited company versus umbrella decision, what IR35 means
for your take-home, which expenses you can legitimately claim, what
contractor accounting support costs, and what Making Tax Digital
requires from you this year.
AccTek is a qualified chartered accountancy practice, ICPA
member, and AML-supervised by HMRC. This guide provides general
information only — not financial or tax advice. Your individual
circumstances will differ; speak to a qualified accountant before making
structure or tax decisions.
Accounting for contractors covers the processes, calculations and
filings that translate your day-rate income into compliant,
properly-taxed take-home pay. For IT contractors specifically, it spans
three distinct layers: your trading structure (limited company or
umbrella company), your employment status for tax purposes under the
IR35 rules, and your ongoing compliance obligations — including
self-assessment, corporation tax, VAT, payroll and, from April 2026,
Making Tax Digital for Income Tax.
A specialist contractor accountant handles all three layers together,
with an understanding of the off-payroll working rules that
general-practice accountants may not have. That specialism is the
practical reason most IT contractors seek out dedicated contractor
accounting services rather than a high-street practice.
The most consequential decision for any IT contractor is how they
trade. The two main options are operating through your own limited
company — often called a Personal Service Company (PSC) — or working via
an umbrella company.
| Factor | Limited Company (PSC) | Umbrella Company |
|---|---|---|
| Tax efficiency | Higher potential take-home via salary + dividends | Lower — employed-level income tax and NI deducted at source |
| Admin burden | Annual accounts, CT return, payroll, confirmation statement | Near-zero — umbrella handles everything |
| IR35 flexibility | You or the end-client assess status per contract | Irrelevant — you are an employee of the umbrella, always inside IR35 |
| Allowable expenses | Broad when outside IR35; significantly restricted inside | Limited to expenses wholly, exclusively and necessarily incurred in the performance of duties |
| Best suited to | Multiple or consistent outside-IR35 contracts; longer contracting careers |
Short-term or single engagements; inside-IR35 determinations; contractors winding down |
For the 2026–27 tax year, the dividend allowance is £500 (GOV.UK).
Dividends above that threshold are taxed at 8.75% (basic rate), 33.75%
(higher rate) or 39.35% (additional rate), depending on your total
income. Corporation tax on company profits stands at 19% for small
profits up to £50,000 and 25% at the main rate above £250,000, with
marginal relief between those thresholds (GOV.UK – Corporation Tax
rates).
For contractors consistently outside IR35, a limited company
typically remains the more tax-efficient structure. For contractors on a
single inside-IR35 engagement or those dipping into contracting
short-term, an umbrella removes administrative overhead with little tax
disadvantage compared to running a dormant PSC alongside it.
AccTek’s IT
contractor accounting service →
IR35, formally the off-payroll working rules, determines whether HMRC
treats your engagement as disguised employment. It does not determine
which trading structure you use — but it determines how income from each
contract is taxed once you operate inside a limited company.
Outside IR35: Your company invoices the client. You
draw a combination of salary and dividends, taking advantage of the
lower tax rates on dividends and the 19%/25% corporation tax regime
rather than paying income tax on the full amount. Allowable business
expenses can be claimed against company income, reducing taxable
profit.
Inside IR35: Your company still raises invoices, but
is required to operate a “deemed payment” calculation: income tax and
National Insurance Contributions are deducted as if you were an employee
of the end-client. For 2026–27, income tax applies at 20% on earnings
between £12,571 and £50,270, 40% between £50,271 and £125,140, and 45%
above that (GOV.UK –
Income Tax rates). Employer’s NI is factored into the calculation,
reducing the net amount that reaches you before the deemed payment is
made.
Who determines IR35 status? For medium and large
end-clients — those meeting two of the three Companies Act size
thresholds (more than 50 employees, more than £10.2m turnover, more than
£5.1m balance sheet total) — the end-client is responsible for making
the determination and issuing a Status Determination Statement (SDS).
For small clients, your PSC continues to self-assess. HMRC’s Check
Employment Status for Tax tool (CEST) is available at GOV.UK
as a starting point, though it does not produce a result HMRC considers
binding in every scenario.
IR35 status should be assessed per contract, per engagement — not
determined once and assumed to hold across all your work. A specialist
contractor accountant can help you review SDS determinations and
understand what questions to raise with an end-client or their
fee-payer.
AccTek’s IR35 guide for
contractors →
If you operate through a limited company and your contracts are
outside IR35, you can claim a broad range of business expenses against
company income. The overriding test is whether the expense is wholly and
exclusively incurred for business purposes (GOV.UK –
Expenses if you’re self-employed).
Technology and equipment – Laptops, monitors,
keyboards and other peripherals purchased for business use – Software
licences, SaaS subscriptions and development tools – Mobile phone
(business-use proportion) – Home office equipment — chairs, desks,
secondary screens — apportioned to business use
Travel and subsistence – Business mileage at HMRC
approved rates (45p per mile for the first 10,000 miles, 25p per mile
thereafter for cars — GOV.UK)
– Rail, air and taxi fares for client meetings – Accommodation on
legitimate overnight business trips – Subsistence within HMRC benchmark
rates when travelling away from your normal place of work
Training and professional development – IT
certifications, courses and exams directly related to your contracting
work – Technical conferences and relevant industry events – Technical
books and journals relevant to your specialism
Professional fees – Accountancy and bookkeeping fees
– Professional indemnity and public liability insurance premiums – IR35
contract review fees – Relevant professional membership
subscriptions
Home office (use-of-home) – A proportionate share of
heating, electricity and broadband can be allocated to business use,
calculated by reference to the rooms used and hours worked
Inside IR35, the position is materially different. Only expenses
“wholly, exclusively and necessarily” incurred in the performance of
your employment duties can be claimed — a significantly stricter test
that disallows most training, subscriptions and home-office costs.
Employer pension contributions made by the company remain available
regardless of IR35 status, making pension planning an important lever
inside IR35 engagements.
Full contractor expenses guide
→
Accounting services for contractors are typically priced on a fixed
monthly retainer rather than hourly, which suits contractors with
predictable, ongoing compliance needs. Indicative market ranges for
2026–27:
| Service level | Typical monthly fee | What is typically included |
|---|---|---|
| Basic compliance | £60–£100 | Annual accounts, corporation tax return (CT600), confirmation statement |
| Full-service contractor package | £100–£175 | Accounts, CT600, self-assessment, monthly payroll, VAT returns, IR35 support |
| Premium or multi-director | £175–£300 | As above, plus quarterly reviews, IR35 contract reviews, advisory access |
Umbrella company fees are separate — typically £20–£30 per week
deducted before the deemed employment calculation runs.
The practical case for specialist contractor accountants over
general-practice firms tends to rest on IR35 familiarity, knowledge of
the off-payroll working rules in practice, and experience with the
specific expense landscape for IT contractors — rather than simply
completing statutory returns.
Making Tax Digital for Income Tax Self-Assessment (MTD for ITSA)
became mandatory from 6 April 2026 for taxpayers with qualifying income
above £50,000 (HMRC
MTD for ITSA guidance).
For IT contractors operating exclusively through a limited company,
MTD for ITSA does not apply directly — the company files its own
corporation tax return and you file a personal self-assessment for your
salary and dividends. However, if you also have sole-trader or landlord
income above the £50,000 threshold, MTD for ITSA applies to those income
sources in addition.
What MTD for ITSA requires (where applicable): –
Compatible software on HMRC’s approved list (GOV.UK)
to maintain digital records throughout the year – Four quarterly digital
updates submitted to HMRC (periods ending 5 July, 5 October, 5 January
and 5 April) – A final declaration, replacing the traditional SA return,
submitted by 31 January following the end of the tax year
For 2026–27, HMRC has confirmed that penalty points for late
quarterly updates will not be charged until 2027–28 — but the
submissions are still required. Maintaining records digitally throughout
the year, rather than reconciling each quarter in a rush, is the most
practical way to stay on top of the obligation.
AccTek is a UK AI-native accountancy practice serving IT contractors,
locum doctors, landlords, SME directors and startups. For IT
contractors, our service includes:
All work is carried out by, or under the supervision of, a qualified
accountant. We are a qualified chartered accountancy practice, ICPA
member, and AML-supervised by HMRC.
View our contractor accountant
service →
IT contractor
accounting — who we help →
A contractor accountant is a specialist who handles the accounting,
tax compliance and financial administration for self-employed
contractors operating through a limited company or sole-trader
structure. Unlike a general accountant, a contractor accountant
understands the off-payroll working rules (IR35), contractor-specific
expense rules, and the interaction between corporation tax, salary and
dividends — which together determine how much an IT contractor actually
takes home from each day-rate engagement.
Full-service contractor accounting in the UK typically costs between
£100 and £175 per month on a fixed-fee basis, covering annual accounts,
corporation tax returns, self-assessment, monthly payroll and VAT. Basic
compliance-only packages start from around £60 per month. Fees vary by
provider and the complexity of your situation — for example, whether you
have multiple income sources or require IR35 contract review support as
part of the service.
The distinction is more commercial than legal. Both terms describe
self-employed individuals working outside permanent employment. In
practice, IT contractors most commonly operate through a limited company
because of higher day rates and the need to assess IR35 status per
engagement. Freelancers more often operate as sole traders, particularly
at lower income levels. The accounting treatment, expense rules and tax
obligations differ meaningfully between a limited company and a
sole-trader structure — so the right starting point is to confirm how
you are actually trading before making any other decisions.
Yes — it matters significantly. Outside IR35, your company is treated
as a genuine business: you can claim a broad range of business expenses
against company income, and pay yourself a combination of salary and
dividends that is typically more tax-efficient than employment income
alone. Inside IR35, a deemed payment calculation applies: income tax and
employee National Insurance are deducted as if you were an employee of
the end-client, and most allowable business expenses are unavailable
under the stricter “wholly, exclusively and necessarily” test. Pension
contributions by the company remain accessible in both scenarios.
Understanding the IR35 position before accepting a contract — and
reviewing any Status Determination Statement issued by a medium or large
client — is an important part of contractor financial planning.
Information correct as at September 2026. Tax thresholds and
rates are for the 2026–27 tax year (6 April 2026 to 5 April 2027). This
article provides general information only and does not constitute
financial or tax advice. Speak to a qualified accountant about your
specific circumstances.
Godwin Pinto ACA (ICAI) is the founder of AccTek and a member of ICPA, with 20+ years of experience in accounting and tax for contractors, startups and SMEs. Previously at PwC.
AccTek is a member firm of the Institute of Certified Practising Accountants (ICPA). Our accountants have a wide range of qualifications and accreditations from trusted professional bodies such as the AAT, ICPA, and ACCA.
