How contractor accounting works in the UK isn’t exactly common knowledge — and that’s not your fault. Most people who start contracting come from employment, where tax just happens automatically, and suddenly they’re responsible for a limited company, corporation tax, self assessment and IR35 all at once.

What Contractor Accounting Actually Covers

Contractor accounting covers everything needed to run your finances properly as a contractor in the UK. That typically means company accounts, corporation tax, self assessment, VAT if you’re registered, and payroll if you pay yourself a salary through your limited company. It’s more involved than being employed, but it’s not as complicated as it might look at first glance.

Most UK contractors operate through either a limited company or an umbrella company. Operating through a limited company means you’re the director and shareholder — the company invoices your clients, pays corporation tax on its profits, and pays you through a mix of salary and dividends. Umbrella companies act as your employer instead, handling tax and National Insurance on your behalf, though they typically charge a weekly or monthly margin for doing so — research suggests this is usually around £20 to £30 per week.

IR35: The Part Most Contractors Worry About

IR35 is the tax legislation HMRC uses to decide whether you’re genuinely self-employed or effectively an employee in disguise. If you’re considered inside IR35, your income is taxed more like an employee’s pay — which usually means significantly more tax and National Insurance. It’s the question I get asked about most by contractors, and the anxiety around it is understandable.

The rules changed for the private sector in April 2021. Medium and large businesses are now responsible for assessing and deciding your IR35 status when you work with them. If you work with smaller clients, you still determine your own status — but it needs to be assessed properly and documented, not just assumed. Getting it wrong in either direction creates real problems.

What Can You Actually Claim as a Contractor?

One of the genuine advantages of running a limited company is the range of allowable expenses that reduce your corporation tax bill. HMRC allows limited companies to claim allowances, expenses and reliefs where costs are incurred wholly and exclusively for business purposes. That covers professional subscriptions, home office costs, travel to client sites, equipment and software used for work.

The phrase that matters is “wholly and exclusively for business purposes.” A laptop used only for client work is straightforward. A laptop that doubles as your family’s Netflix machine is less clear-cut. I always tell contractors to keep clean records and check anything that feels uncertain — claiming something borderline isn’t worth the stress if HMRC ever queries it.

What a Good Contractor Accountant Does for You

A good contractor accountant doesn’t just file your returns and disappear until the next deadline. They help you structure your salary and dividends in a tax-efficient way, flag what’s coming before it becomes urgent, and answer questions throughout the year — not just at year-end when you’re already stressed. That ongoing availability is the part that makes the biggest practical difference.

If you work in construction, there’s an extra layer to be aware of. Under the Construction Industry Scheme (CIS), all payments from contractors to subcontractors must account for the subcontractor’s tax status, and from 6 April 2026 the obligation to file a nil CIS return is being reinstated for mainstream contractors. It’s another reason why having someone who genuinely understands contractor accounting — not just general small business bookkeeping — is worth it.