If you bill clients as a consultant, no one deducts tax from your invoices for you. That job is yours. Get it right and you stay compliant and keep more of what you earn. Get it wrong and you face penalties, interest, and a nasty surprise in January.
This guide walks you through the parts that actually move the needle for UK consultants: how you're taxed as a sole trader, how a limited company differs, what you can legitimately claim, where IR35 bites, and the few changes landing for 2026/27. Every figure here is for the 2025/26 tax year unless stated, and each one is tied to its gov.uk source.
It's written for IT consultants, management consultants, engineers and any independent professional trading on their own account, whether you're a contractor just starting out or running an established limited company.
Should you be a sole trader or a limited company?
This is the first decision that shapes everything else, your tax, your admin, and your personal liability.
A sole trader is the simplest setup. You and the business are one and the same. You pay Income Tax and Class 4 National Insurance on your profit (your income minus allowable expenses) through Self Assessment. Registration is quick and the running costs are low. The trade-off is unlimited personal liability and fewer planning levers.
A limited company is a separate legal entity that you own and direct. It gives you limited liability and, for many consultants, more tax flexibility, because you can pay yourself with a mix of salary and dividends rather than being taxed on every pound of profit as income. The cost is more admin: statutory accounts, a Companies House filing, a Corporation Tax return, and payroll if you take a salary.
There's no universal cut-off where one beats the other. As a rough guide, the limited company route tends to come into its own once profits are comfortably into five figures and stable, but it depends on how much you draw, whether you have other income, and your appetite for admin. Run the numbers for your own situation, or ask us to.
| Factor | Sole trader | Limited company |
|---|---|---|
| Tax on profit | Income Tax (20/40/45%) + Class 4 NI | Corporation Tax (19-25%), then dividend tax on what you draw |
| Liability | Unlimited (personal assets at risk) | Limited (subject to director duties) |
| Admin | Lighter: one Self Assessment return | Heavier: accounts, Companies House, CT600, payroll |
| Profit extraction | All profit taxed as it arises | Salary + dividends, with timing flexibility |
How much tax does a sole trader consultant pay in 2025/26?
As a sole trader you pay Income Tax and Class 4 National Insurance on your profit.
For 2025/26 the Income Tax bands (England, Wales and Northern Ireland) are:
| Band | Taxable income | Rate |
|---|---|---|
| Personal Allowance | First £12,570 | 0% |
| Basic rate | £12,571 to £50,270 | 20% |
| Higher rate | £50,271 to £125,140 | 40% |
| Additional rate | Over £125,140 | 45% |
Your Personal Allowance is reduced by £1 for every £2 of income over £100,000, so it disappears entirely at £125,140. Scotland sets its own Income Tax rates and bands, so if you're a Scottish taxpayer these figures don't apply to you.
On top of Income Tax, Class 4 National Insurance for 2025/26 is 6% on profits between £12,570 and £50,270, then 2% above £50,270.
Class 2 NI is no longer a compulsory flat weekly charge. If your profits are at or above the Small Profits Threshold of £6,845, your NI record is maintained without paying anything. If your profits are below that, you can pay voluntary Class 2 at £3.50 a week for 2025/26 to protect your State Pension entitlement.
Illustrative example: Sole trader, £50,000 profit (2025/26) Daniel is a self-employed IT consultant with £60,000 of fees and £10,000 of allowable expenses, leaving £50,000 of taxable profit and no other income. - Income Tax: (£50,000 − £12,570) = £37,430 taxable, all within the basic-rate band, so £37,430 × 20% = £7,486 - Class 4 NI: (£50,000 − £12,570) = £37,430 × 6% = £2,245.80 - Total: £9,731.80, an effective rate of about 19.5% on £50,000 of profit.
Illustrative example: Sole trader, £80,000 profit (2025/26) - Income Tax: £37,700 × 20% = £7,540, plus (£80,000 − £12,570 − £37,700) = £29,730 × 40% = £11,892. Total Income Tax = £19,432 - Class 4 NI: £37,700 × 6% = £2,262, plus £29,730 × 2% = £594.60. Total NI = £2,856.60 - Total: £22,288.60, an effective rate of about 27.9%.
Nothing is taken at source, so set money aside as you go. Putting roughly 25% to 30% of profit into a separate tax account is a sensible habit for most consultants at these levels. You can sanity-check your own position with our self-employed tax calculator or HMRC's Self Assessment estimator.
Sole trader tax is paid through Self Assessment. You file and pay by 31 January after the tax year ends, and if your bill is over £1,000 you'll usually make payments on account on 31 January and 31 July towards the following year.
What expenses can a self-employed consultant claim?
You can deduct costs incurred wholly and exclusively for the business. That's the test: the cost must be for running your consultancy, not personal spending. Claiming everything you're entitled to is the simplest, most reliable way to lower your bill.
Common allowable costs for consultants include:
- Home-office costs, either by working out the business proportion of your bills or using HMRC's simplified flat rate based on hours worked from home: £10/month for 25-50 hours, £18/month for 51-100 hours, and £26/month for 101 hours or more. The flat rate doesn't cover phone or internet, so claim the business share of those separately.
- Software and subscriptions used for the business: accounting and project tools, industry applications, professional body memberships and trade publications.
- Equipment such as laptops and monitors. Larger purchases are usually claimed as capital allowances, where the Annual Investment Allowance lets companies and unincorporated businesses deduct up to £1,000,000 of qualifying plant and machinery in the year.
- Business travel. Mileage in your own car can be claimed at HMRC's simplified rate of 45p per mile for the first 10,000 business miles and 25p thereafter. Train fares, parking and trip accommodation are allowable too. Commuting to a regular client base usually isn't, but travel between client sites is.
- Training that maintains or updates your existing skills.
- Professional fees: accountancy, legal advice and business insurance.
- Marketing: website hosting, advertising and networking.
What you can't claim: personal spending, client entertainment, ordinary commuting, everyday clothing, and any fines or penalties.
Keep receipts, invoices and bank records for everything. Good records don't just protect you in an enquiry, they make sure you don't miss deductions you're entitled to. Our bookkeeping service takes this off your plate.
How does tax work for a limited company consultant?
Run your consultancy through a company and the tax sits in two layers: the company pays Corporation Tax on its profit, then you pay personal tax on what you draw out.
Corporation Tax
For Financial Year 2025, Corporation Tax is:
- 19% (small profits rate) on profits up to £50,000
- 25% (main rate) on profits over £250,000
- Marginal relief between £50,000 and £250,000, which gives an effective rate climbing from 19% towards 25%
Salary and dividends
Most director-shareholders take a modest salary plus dividends. A common approach is a salary that uses the Personal Allowance while keeping employee NI low, then dividends on top. Dividends are taxed at lower rates than salary and don't carry NI.
For 2025/26, dividend tax rates are 8.75% (basic), 33.75% (higher) and 39.35% (additional), after a £500 dividend allowance. You can model the trade-offs with our dividend tax calculator.
One thing to watch: a company whose only employee is a single director generally can't claim the Employment Allowance, so a salary above the £5,000 secondary threshold creates employer NI at 15%. That's why the right salary level is worth getting advice on rather than copying a figure off a forum.
Illustrative example: Limited company, £80,000 profit (2025/26) Suppose the company has £80,000 of profit before the director's salary, and the director takes a £12,570 salary plus dividends. - Employer NI on salary: (£12,570 − £5,000) = £7,570 × 15% = £1,135.50 - Profit after salary and employer NI: £80,000 − £12,570 − £1,135.50 = £66,294.50 - Corporation Tax with marginal relief: about £13,818, leaving roughly £52,476 for dividends - If the director draws £40,000 of dividends: less the £500 allowance gives £39,500 taxable. With the £12,570 salary using the Personal Allowance, £37,700 falls in the basic band (£37,700 × 8.75% = £3,298.75) and £1,800 in the higher band (£1,800 × 33.75% = £607.50), so dividend tax is about £3,906. The salary is covered by the Personal Allowance, so there's no Income Tax on it and, at £12,570, no employee NI. The company also keeps the undrawn profit, which stays inside the business until distributed. The headline point: by splitting pay between salary and dividends, the overall tax on profit you actually extract can be lower than the sole trader equivalent, but the gap depends heavily on how much you draw.
Because the figures swing with how much you take out, treat this as illustrative only, not a target. The right mix is personal to you.
VAT, PAYE and accounts
If your taxable turnover exceeds the VAT registration threshold of £90,000 in any rolling 12 months, you must register, normally within 30 days. Some consultants register voluntarily below that to reclaim VAT on purchases, which makes sense when your clients can recover VAT themselves.
If you pay yourself a salary you'll run PAYE and report through RTI, even when the salary is below the tax and NI thresholds. And every company files annual statutory accounts at Companies House plus a Corporation Tax return with HMRC. Our Corporation Tax and statutory accounts services cover both.
What is IR35 and does it affect you?
IR35, the off-payroll working rules, exists to catch "disguised employment", where someone works through a company but in substance behaves like an employee of the client. If a contract falls inside IR35, it's taxed broadly like employment and the limited-company advantages largely disappear. So your status on each contract matters.
Who decides depends on the client. With small private-sector clients you assess your own status. With public-sector bodies and medium or large private clients, the client makes the determination and may deduct tax at source.
HMRC weighs several factors, none decisive on its own:
- Control: how much say the client has over what you do and how, when and where you do it. Heavy day-to-day direction points towards employment.
- Substitution: whether you could send a qualified substitute. A genuine right to substitute points away from employment.
- Mutuality of obligation: whether the client must offer work and you must accept it, beyond the current engagement.
- Financial risk: whether you stand to lose money, for example fixing defective work at your own cost.
- Equipment and integration: whose tools you use and how embedded you are in the client's team.
HMRC's free Check Employment Status for Tax (CEST) tool gives a determination based on your answers, and HMRC will stand behind it where the information is accurate. It isn't legally binding, so keep your own evidence too.
Illustrative example: one consultant, three different contracts Sandeep is an IT consultant with three concurrent clients, and each contract has to be judged on its own facts. - Client A: a 12-month role, four days a week at the client's office, using their kit, taking daily direction from their IT manager, no substitution right, paid a day rate. These features (high control, no substitution, heavy integration) point towards inside IR35. - Client B: a three-month fixed-price project delivered remotely on his own equipment, with a substitution clause and outcome-based deliverables. These point towards outside IR35. - Client C: several short advisory assignments paid per piece of work, using his own tools, across different teams. A genuine consultancy pattern, pointing outside IR35. The lesson isn't the labels, it's that status is assessed contract by contract, and a long, embedded engagement is the one most likely to drift inside over time.
If you contract regularly, we cover IR35 reviews as part of our tax advisory service, and IR35 contractors is our dedicated page for the detail.
How can you cut your consultant tax bill legally?
Tax planning (legal) and tax avoidance schemes (a minefield) are not the same thing. Here are the legitimate levers most consultants have:
- Pick the right structure. As profits and drawings grow, the company route often wins, but only your numbers tell you when.
- Claim every allowable expense. The most-missed are home-office flat rates, the business share of phone and internet, mileage, and professional subscriptions.
- Time income and costs. With some control over when you invoice and spend, you can sometimes keep income out of the higher-rate band in a given year. Don't let the tax tail wag the commercial dog, though.
- Pay into a pension. Contributions are tax-efficient, and for a company an employer pension contribution can get Corporation Tax relief without the dividend tax. For 2025/26 the pension annual allowance is £60,000, and personal contributions attract relief up to 100% of your earnings, subject to that allowance.
- Use your allowances. The £12,570 Personal Allowance, the £500 dividend allowance, and the £3,000 Capital Gains annual exempt amount where relevant.
- Split income where it's genuine. If a spouse genuinely works in or owns part of the business, their allowances and bands can be used. It has to reflect reality, not a paper arrangement.
What to steer well clear of: "too good to be true" avoidance schemes, disguised remuneration, under-reporting income, and dressing up personal costs as business ones. They end in penalties and interest.
What's changing for 2026/27?
A couple of changes are already legislated and worth planning around now.
Dividend tax rises from 6 April 2026. For 2026/27 the basic rate goes to 10.75% and the higher rate to 35.75%, while the additional rate stays at 39.35%. The £500 dividend allowance is unchanged. If you draw meaningful dividends, this nudges up your personal tax from April 2026, so it's worth reviewing the timing of distributions with your accountant well before the year-end.
Making Tax Digital for Income Tax (MTD for ITSA) begins phasing in. From 6 April 2026 it applies to sole traders and landlords with qualifying income over £50,000 (based on 2024/25), and from 6 April 2027 the threshold drops to £30,000. If you're caught, you'll keep digital records and send quarterly updates to HMRC rather than a single annual return. You can check when you need to sign up on gov.uk.
We don't speculate about measures that aren't yet law. When the next Budget changes something that affects you, that's a conversation we'll start, not one you'll have to chase.
How can a Zmartly accountant help?
Tax for consultants isn't hard so much as fiddly, and the cost of getting the fiddly bits wrong is real. We handle the compliance (Self Assessment, Corporation Tax, VAT and payroll) so your filings are accurate and on time, and we do the planning that actually saves money: the right structure, a sensible salary-and-dividend split, full expense claims, pension planning, and a clear-eyed read on your IR35 status.
We work with consultants and engineers day in, day out, so we know the expenses you can claim, the traps in long contracts, and how to keep your tax efficient as your income moves around.
Want to know if you're set up the right way? Book a free 20-minute call with a Zmartly accountant and we'll review your structure, your expenses and your IR35 exposure, and tell you straight whether there's money on the table.
Frequently asked questions
Do you pay tax on consulting income in the UK?
Yes. Consulting income is taxable. As a sole trader you pay Income Tax and Class 4 National Insurance on your profit through Self Assessment. As a limited company you pay Corporation Tax on company profit, then personal tax on the salary and dividends you take out.
How much tax does a self-employed consultant pay?
It depends on your profit and structure. For 2025/26, sole traders pay Income Tax at 20%, 40% or 45% plus Class 4 NI at 6% (then 2% above £50,270). Limited companies pay Corporation Tax of 19% to 25%, then dividend tax of 8.75% to 39.35% on what's distributed. A higher-earning consultant often pays less overall through a company, but it depends on how much you draw.
What expenses can a consultant claim?
Anything incurred wholly and exclusively for the business: home-office costs, software and subscriptions, equipment, business travel, training that updates existing skills, professional fees and marketing. Personal spending, client entertainment and ordinary commuting can't be claimed.
Should a consultant be a sole trader or a limited company?
Sole trader is simpler and suits people starting out or with modest, variable profits. A limited company tends to be more tax-efficient as profits and drawings grow, and adds limited liability, at the cost of more admin. The crossover point is personal, so it's worth modelling both.
What is IR35 and does it affect consultants?
IR35 decides whether a contract worked through a company is really disguised employment. If a contract is inside IR35, it's taxed broadly like employment. Genuine consultants with multiple clients, substitution rights and real financial risk usually fall outside, but each contract is judged on its own facts.
Does a consultant need to register for VAT?
You must register if your taxable turnover passes £90,000 in any rolling 12-month period, normally within 30 days. You can register voluntarily below that to reclaim VAT on purchases, which is often worthwhile when your clients can recover VAT.
When does a consultant pay tax?
Sole traders file and pay through Self Assessment by 31 January after the tax year ends, with payments on account on 31 January and 31 July if the bill tops £1,000. Limited companies pay Corporation Tax nine months and one day after the accounting period ends.
