Finance Guide for Contractors
The decisions IT, engineering and interim contractors need to get right: structure, IR35, banking, expenses and tax.
If work is genuinely outside IR35, a personal service company (PSC) may suit the contract and can offer company-level pension and profit-retention options. It does not guarantee a higher take-home amount: the result depends on contract status, fees, salary, dividends, employer NIC and personal circumstances. For work treated as inside IR35, an umbrella or another compliant payroll route may be simpler; compare the actual deductions and service fees.
Limited company vs umbrella
The structure decision for contractors is driven by IR35 status, not by personal preference. Outside-IR35 work may suit a personal service company (your own limited company), depending on the contract, liability and administration. A PSC can pay salary or dividends and may make employer pension contributions, but this is not a guaranteed tax advantage or a default extraction mix. Inside-IR35 work is treated as employment income for tax, so an umbrella or another compliant payroll route may be simpler; compare the actual assignment calculations and service fees.
| Factor | Limited company (PSC) | Umbrella |
|---|---|---|
| Best for | Outside-IR35 contracts | Inside-IR35 contracts |
| Setup time | 1–2 days | Same day |
| Admin | Accountant £100–£150/month | Margin £15–£30/week |
| Tax treatment | Company tax and owner extraction; IR35 and personal circumstances matter | Employment-income/payroll treatment; compare the actual assignment calculation |
| Pension | Employer contributions from company | Personal contributions only |
| Liability | Limited | Employed by umbrella |
IR35 status determination
For medium and large clients in the private sector and all public sector engagements, the end client is legally responsible for determining your IR35 status and issuing a Status Determination Statement (SDS). For small private-sector clients (broadly: turnover under £10.2m, balance sheet under £5.1m, fewer than 50 employees), the determination remains with your PSC.
The three pillars HMRC tests are: personal service (can you send a substitute?), mutuality of obligation (must the client offer work and must you accept?) and control (who decides how, when and where the work is done?). Working practices matter as much as the contract — get an independent review for any contract you intend to run outside IR35.
If you operate outside IR35, take out IR35 tax investigation insurance (£100–£300/year). It covers the cost of professional defence in an HMRC enquiry — which alone can run to £5,000+ regardless of outcome.
Banking setup
A PSC needs a business current account and a savings account for the Corporation Tax pot. Many contractors also keep a second savings account for VAT if VAT-registered. A business credit card simplifies travel expense reconciliation and builds a credit footprint for the company.
Up to £200: £75 card-spend reward plus a conditional £125 saver bonus
Spend £100 on your Tide card within 30 days for £75; for the extra £125, deposit at least £5,000 into a Tide Instant Saver within 7 days and keep it there for one month
Offer details confirmed 3 November 2026. Review due 3 December 2026.
- Free standard UK business account opening
- Invoicing, payment links and expense cards in one app
- Promo code
REFER200— terms and eligibility apply.
Salary, dividends and pension
A PSC may pay salary, dividends or employer pension contributions, but none is a universal default. For 2026/27, compare the employer NI Secondary Threshold (£5,000), Lower Earnings Limit (£6,708) and Personal Allowance (£12,570), then account for Employment Allowance eligibility, other PAYE income, NI qualifying years, company profit and pension plans. The £40,000 illustration in our sole-trader/company comparison is one scenario only. Inside-IR35 income handled through payroll does not use this company extraction model.
Use the Director Salary & Dividend Calculator to explore illustrative salary-and-dividend profiles, then have an accountant confirm any change to payroll or extraction. The tool does not replace advice on Employment Allowance, IR35, pensions or your wider tax position.
Expenses you can claim
Common contractor expenses
0/7 · 0%The 24-month rule is the big one for contractors: travel and subsistence to a workplace become disallowable once you know (or reasonably expect) you will be there for more than 24 months. Track contract extensions carefully.
Surviving gaps between contracts
Plan for at least one month per year unpaid. Hold three months of personal outgoings in cash, keep a credit facility available, and use quieter periods to top up the pension and tackle training. A PSC with healthy retained profit and an employer pension habit makes contract gaps a planning question rather than a crisis.
Frequently asked questions
Usually no — keep it dormant in case outside-IR35 work returns. Dormant company filings are simple and cheap. Discuss the right action with your accountant.
Yes. Many contractors use a PSC for outside-IR35 work and accept umbrella PAYE for inside-IR35 engagements. The agency or client typically gives you the choice when the role is determined inside IR35.
Less attractive since "limited cost trader" rules brought in a 16.5% rate for most contractors. Run the numbers against standard VAT before opting in.
For a typical outside-IR35 PSC, set aside roughly 19% of pre-tax profit for Corporation Tax (or the small-profits rate applicable to your year) plus a personal tax pot of 10.75–35.75% of dividends depending on band.
Related guides
Some links on this page are affiliate or referral links. If you apply through them we may receive a commission, at no extra cost to you. This does not influence our editorial recommendations — see our editorial policy and affiliate disclosure.
Information on this page is general guidance for UK small businesses and is not financial, tax or legal advice. Tax rules, allowances and product terms change. Always check current information with HMRC, Companies House or a qualified professional before making decisions.