Finance Guide for Consultants

Sole trader or limited?

The same crossover applies to consultants as to other freelancers, but it tilts towards limited company sooner because day rates push profit above the £40k–£50k threshold quickly and because corporate clients prefer to engage with a limited company. The added admin (annual accounts, Corporation Tax, payroll for your own salary, dividend paperwork) is a fair trade for the liability protection and tax flexibility.

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 (2024–25) — and unused allowance from the previous three years can be carried forward.

Many consultants also use a small salary up to the NI Secondary Threshold plus dividends as the core extraction strategy. Above the higher-rate threshold, additional pension contributions usually beat dividends on after-tax basis.

Expenses you can claim