How to Start as an IT Contractor in the UK

IT contracting is one of the most lucrative forms of self-employment in the UK. Day rates for experienced developers, architects, project managers, and security specialists are substantially higher than permanent salaries. But the tax landscape — particularly IR35 — requires careful navigation.

IR35 — The Essential Issue

Before anything else, understand IR35 (off-payroll working rules). This determines whether HMRC treats you as genuinely self-employed or as a disguised employee.

Since April 2021, for medium and large private sector clients, the end client determines your IR35 status. For small companies, you still make the determination yourself.

Inside IR35: You pay tax and NI equivalent to an employee, eliminating most tax advantages of contracting. You may still contract through a limited company or use an umbrella company.

Outside IR35: You benefit from the tax efficiencies of operating through a limited company — paying yourself a mix of salary and dividends.

Key factors for IR35 status:

• Substitution — can you send someone else?
• Control — does the client dictate how you work?
• Mutuality of obligation — must they offer work, and must you accept?

Working with multiple clients, using your own equipment, and having genuine control over how you deliver work all point towards outside IR35.

Sole Trader, Limited Company, or Umbrella?

Limited Company (Personal Service Company)

The most common structure for IT contractors outside IR35. You invoice through your company, pay yourself a small salary, and take the rest as dividends. This is the most tax-efficient option when outside IR35.

Umbrella Company

Used when you are inside IR35 or prefer not to run a limited company. The umbrella employs you, invoices the client/agency, and pays you through PAYE after deducting tax, NI, and their fee. Simple, but you lose the tax advantages.

Sole Trader

Less common for IT contractors. Works if your engagements are short-term and you have multiple clients, but most agencies and clients expect a limited company.

Registering with HMRC

Limited company: Register for Corporation Tax within three months of starting to trade. Register for PAYE to pay yourself a salary. Register for VAT when turnover exceeds £90,000 (most IT contractors hit this quickly).

Sole trader: Register for Self Assessment within three months.

VAT: Most IT contractors should register for VAT, as your clients are businesses who can reclaim it. The flat rate for computer and IT consultancy is 14.5%. Compare this with the standard scheme to determine which saves you money.

Insurance

• Professional indemnity insurance — most clients and agencies require this. £1–2 million cover is typical. Costs £200–£600 per year.
• Public liability — if you work on client premises
• Cyber insurance — relevant if you handle client data or systems
• Directors' and officers' insurance — if operating through a limited company
• Tax investigation insurance — covers accountancy costs if HMRC investigates

Claimable Expenses

Outside IR35 (Limited Company)

• Salary and employer's NI — the salary you pay yourself
• Pension contributions — highly tax-efficient through a company
• Home office costs — rent a room from yourself (up to £6 per week tax-free) or actual costs
• Equipment — laptops, monitors, peripherals, development environments
• Software subscriptions — IDEs, cloud services, testing tools, project management
• Training and certifications — AWS, Azure, professional certifications
• Travel and subsistence — to client sites (if temporary workplace rules apply)
• Professional memberships — BCS, IEEE, etc.
• Insurance premiums
• Accountancy fees — a significant cost for limited company contractors
• Phone and broadband
• Marketing — website, LinkedIn, portfolio

Inside IR35

Expense claims are severely limited. You can only claim travel and subsistence in very restricted circumstances.

Accounted tracks all your expenses and keeps your records clean for your accountant or self-managed accounts.

Day Rates

IT contractor rates in the UK vary significantly by specialism, experience, and location:

• Junior developers — £300–£450 per day
• Mid-level developers — £450–£600 per day
• Senior developers/architects — £600–£900 per day
• DevOps/Cloud engineers — £500–£800 per day
• Project/programme managers — £500–£800 per day
• Security specialists — £600–£1,000+ per day
• Data engineers/scientists — £500–£900 per day

London rates are typically 10–30% higher than elsewhere.

Industry-Specific Tax Considerations

Salary and Dividends (Outside IR35)

The optimal salary level changes each year. Currently, many contractors pay themselves a salary at the NI secondary threshold (around £9,100) and take the rest as dividends. Dividends are taxed at lower rates than salary (8.75% basic rate, 33.75% higher rate).

Pension Contributions

Company pension contributions are one of the most tax-efficient ways to extract money from your limited company. They are a deductible company expense, not subject to Corporation Tax or NI.

Annual Investment Allowance

Equipment purchases are deductible through the AIA. For most contractors, the main items are computers and monitors.

Retained Profits

Profits left in your company are subject to Corporation Tax (currently 25% for profits over £250,000, 19% for profits under £50,000, with marginal relief between). Plan your extraction strategy to minimise overall tax.

Finding Contracts

• Recruitment agencies — still the primary route for most IT contractors
• Job boards — ContractorUK, Jobserve, ITJobsWatch, LinkedIn
• Your network — former colleagues and clients
• Direct approaches — some contractors work directly with clients, avoiding agency fees
• Online platforms — Toptal, Upwork (for remote work)

Bookkeeping Tips

• Use a specialist contractor accountant — they understand IR35, dividend planning, and contractor tax
• Separate business and personal finances completely
• Submit VAT returns on time — penalties are automatic
• Keep records of all contracts and IR35 determinations
• File accounts and returns on time — Companies House and HMRC deadlines are strict
• Plan your tax extraction strategy — salary, dividends, pension, and timing all matter

Accounted is built for UK sole traders and small company directors. Connect your bank and let AI handle the day-to-day categorisation.

Key Deadlines

• Quarterly — VAT returns
• Monthly — PAYE returns (if paying yourself a salary)
• 9 months after year end — Corporation Tax payment
• 12 months after year end — Corporation Tax return
• 31 January — Self Assessment (personal tax return)

Getting Started

IT contracting offers exceptional earning potential and flexibility. Get your structure right, understand IR35, and keep your finances well-managed from day one.

Ready to keep your contracting finances in order? Sign up for Accounted and let Penny manage the bookkeeping while you focus on delivering great work.