Finance Guide for Consultants

Sole trader or limited?

There is no reliable £40,000–£50,000 profit crossover that applies to every consultant. Sole-trader profit is taxed with the owner’s other income and Class 4 NIC; a company has its own Corporation Tax and may add employer NIC, payroll and personal dividend tax. The result changes with other income, salary, Employment Allowance, pension contributions, associated companies and whether profit stays in the company. Start with the dated £40,000 example in our structure comparison, then model your own assumptions.

Setting your day rate

A common mistake is anchoring on what an employee earns. As a consultant you carry your own pension, holiday, sick leave, training, insurance and downtime — and you only bill a fraction of available days. The realistic billable year for a working consultant is 140–180 days, not 220. Take your target take-home salary, gross it up for tax and NI, add 25% for benefits and downtime, then divide by your realistic billable days. Most independent consultants in the UK price between £600 and £1,500 per day.

Banking and cards

Open a dedicated business current account on day one and a savings account for the Corporation Tax pot. A business credit card simplifies travel and software spend and helps build a business credit footprint — useful later if you ever want a working capital facility or property lease in the company name.

Invoicing and contracts

Use a Statement of Work (SoW) for every engagement that includes scope, deliverables, day rate, expenses policy, payment terms, IR35 status, intellectual property, confidentiality and termination clauses. Most consultants invoice monthly in arrears on net-14 terms, with a deposit for engagements over £20k. Larger corporates may push to net-45 or net-60 — push back, and at minimum get the engagement letter signed and a purchase order issued before any work starts.

IR35 — what to know

IR35 (the "off-payroll working rules") determines whether HMRC treats you as genuinely self-employed or as a "deemed employee" of the client. Since April 2021, medium and large clients in the private sector are responsible for the status determination; with small clients, the determination sits with your limited company.

An "inside IR35" engagement means income tax and NICs are deducted at source as if you were on payroll — the limited company effectively becomes a pass-through. "Outside IR35" means you operate normally as a company. Your contract and the working practices matter. Things that point to outside status include: a right of substitution, no mutuality of obligation, your control over how the work is done, and operating with multiple clients.

Pension and tax planning

A SIPP or workplace-style pension funded by employer contributions from your limited company is one of the most powerful tax tools available to consultants. Employer contributions reduce Corporation Tax, are not subject to NICs, and are not counted as personal income. The annual allowance is £60,000 (2026/27) — and unused allowance from the previous three years can be carried forward.

There is no universal “small salary” target. For a PSC, compare the 2026/27 employer NI Secondary Threshold (£5,000), Lower Earnings Limit (£6,708) and Personal Allowance (£12,570), then include the director’s other PAYE income, NI record, Employment Allowance eligibility, company profit and dividend bands. An employer pension contribution can reduce taxable company profit when the conditions are met, but annual allowance, carry-forward and commercial-purpose rules apply. Ask an accountant to compare the whole scenario.

Expenses you can claim