Tax Guide for IT Contractors: IR35, Expenses, and Structure

The Accounted Business Team·2 February 2026·4 min read

Contracting in IT: The Tax Landscape

IT contracting in the UK offers excellent earning potential and flexibility. But the tax side is more complex than almost any other self-employed profession, largely because of IR35.

This guide covers the key tax considerations for the 2025/26 tax year: IR35 status, business structure, allowable expenses, and how pension contributions can be a powerful tax-planning tool.

IR35: The Rule That Defines Everything

IR35 asks one question: if there were no intermediary (your limited company), would this contract look like employment? If yes, the contract is "inside IR35" and you are taxed similarly to an employee. If no, it is "outside IR35" and you benefit from the tax efficiencies of a limited company.

Inside IR35

Income is treated as deemed employment. Tax and employee's NI are deducted at source. You can claim a 5% flat-rate deduction for running your company, but beyond that, the treatment is similar to employment — without the employment rights.

Outside IR35

You can pay yourself a small salary (usually at or below the NI primary threshold) and take the rest as dividends. For 2025/26, dividend tax rates are 8.75% (basic), 33.75% (higher), and 39.35% (additional), with a £500 tax-free allowance. Compared to the combined Income Tax and NI rate on salary, the saving is substantial.

Who Decides?

Since April 2021, medium and large private sector clients determine your IR35 status via a Status Determination Statement. Small companies (below two of: £10.2m turnover, £5.1m balance sheet, 50 employees) leave the determination to you. HMRC considers control, substitution, mutuality of obligation, financial risk, integration into the client's organisation, and equipment provision.

Business Structure

Limited Company

Most outside-IR35 contractors operate through a limited company for the salary/dividend split, profit retention, limited liability, and professional image. The downsides are admin (company accounts, Corporation Tax, VAT) and accountancy costs. Corporation Tax is 19% on profits up to £50,000 and 25% above £250,000.

Sole Trader

Simpler — no company accounts or Corporation Tax. All profits are taxed as personal income. This can make sense if contracts are consistently inside IR35.

Umbrella Company

An option for inside-IR35 contracts. The umbrella employs you, handles PAYE, and charges a fee. Be cautious — avoid aggressive tax avoidance schemes and stick with FCSA-accredited umbrellas.

Allowable Expenses

Hardware and Software

Laptops, monitors, keyboards, tablets, smartphones (business proportion), and storage drives qualify for capital allowances — claimable in full under the £1 million AIA. Software subscriptions are straightforward expenses: IDEs, cloud services, project management tools, version control, design tools, communication tools, office software, and security tools.

Training

Technical courses, certifications (AWS, Azure, Kubernetes, TOGAF, PRINCE2), online learning platforms, conferences, technical books, and exam fees are claimable. IT moves fast, and keeping current is a core part of the job.

Travel and Subsistence

If your client site is a temporary workplace (expected duration under 24 months), travel costs are claimable: mileage, train fares, hotels, meals while away, and parking. If a contract extends past 24 months at the same site, it becomes permanent and travel stops being claimable.

Other Expenses

Professional indemnity insurance, accountancy fees, and home working costs (£6/week flat rate through a limited company, or actual proportion of household costs with evidence) are all claimable.

Pension Contributions: The Big Tax Win

For limited company contractors, employer pension contributions are one of the most efficient tax-planning tools available. Your company can make contributions that are deductible for Corporation Tax, not subject to Income Tax or NI for you, and not counted as a benefit in kind.

The annual pension allowance for 2025/26 is £60,000 (or 100% of earnings). You can carry forward unused allowance from the previous three years.

Consider this: if your company has £40,000 of profit after salary and expenses, taking it as dividends means paying Corporation Tax then dividend tax (combined effective rate of 25-50% depending on your income). Contributing it to a pension means zero tax on the way in. You pay tax when you draw the pension, but 25% of withdrawals are tax-free, and you may be in a lower bracket by then.

If you are inside IR35 or using an umbrella, personal pension contributions still get basic-rate tax relief automatically, with higher-rate relief claimed through Self Assessment.

VAT

If turnover exceeds £90,000, you must register for VAT. Most IT contractor clients are VAT-registered businesses who can reclaim the VAT you charge, so it does not make your services more expensive for them. The Flat Rate Scheme can simplify VAT accounting, though the limited cost trader rules have reduced its benefit for contractors with low material costs.

Keep Everything Organised

IT contractors often have complex finances — multiple contracts, varied expenses, pension contributions, VAT, and Corporation Tax. If you are looking for a straightforward way to track income and expenses, Accounted can help. Start your free trial and let Penny, our AI bookkeeper, categorise your transactions and keep your records in order. Whether you are chasing an overdue invoice or preparing for year-end, accurate books make everything easier.

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