The Real Tax Impact of IR35 on Your Limited Company

The Real Tax Impact of IR35 on Your Limited Company


If you’re thinking about jumping into the world of contracting through your very own limited company, you need to do your research. The excitement of being a fully fledged business owner is undeniable, but that doesn’t mean you should dive straight into setting up a limited company, without giving the tax implications of IR35 a second thought. The rules could significantly impact your earnings, as IR35 directly impacts how your income is taxed and how much control you have over that income. By understanding IR35, you can determine whether operating through a limited company is the most beneficial route for your business, or if you need to consider another option.


At Go Limited, we know that IR35 can be confusing, especially for new contractors. But, that doesn’t mean the limited company approach to contracting should be dismissed altogether. In fact, if your contracts fall outside IR35, the tax implications could actually work in your favour.

You have 45 days to return items for a full refund, with or without a receipt. Items must still have their original tags.

You have 45 days to return items for a full refund, with or without a receipt. Items must still have their original tags.

You have 45 days to return items for a full refund, with or without a receipt. Items must still have their original tags.

• contractor weighing pros and cons of limited company IR35

Deep Dive Into IR35: What It Means for Limited Company Contractors

Before you start the process of setting up a limited company, familiarise yourself with IR35. HMRC introduced the legislation to prevent contractors from using limited companies as a way to disguise what is actually seen as employment. The aim of IR35 is to ensure that those working like employees pay the same tax as actual employees, and they don’t benefit from loopholes, even if they operate through their own business.


If your working arrangement is classed as being inside IR35, you’re deemed to be an employee for tax purposes. This limits the financial benefits associated with limited companies, such as dividend payments and allowable expenses, which are both tax-efficient ways of contracting. If you’re outside IR35, you're seen as an independent business providing services, and you maintain access to various tax planning opportunities, many of which boost your take-home pay.


Inside IR35 vs Outside IR35: What’s the Tax Difference?

They might sound similar, but working inside IR35 and outside IR35 are hugely different. 


Contracting Inside IR35

When a contract is considered to be inside IR35, your income is treated similarly to that of a standard employee. This means your payments are subject to PAYE tax and National Insurance contributions (NICs), you can’t pay yourself dividends, and your ability to claim expenses is really limited. You have to cover the cost of running your limited company, but without employment perks like paid holidays or sick leave that traditional employees have access to.


Contracting Outside IR35

If your contract is deemed to fall outside of IR35, you are recognized as a legitimate business operating on a freelance or contractual basis. This IR35 status provides various tax advantages, allowing you to take a smaller salary and compensate for the difference with dividend payments, which are taxed at a lower rate. Additionally, you can deduct a wide array of business expenses before calculating your tax obligations.


IR35 Implications: Why You Need to Be Proactively Tax Planning 

If you don’t want to get caught up in the tax implications of IR35 for limited companies - some of which are beneficial, some of which can hold you back if you don’t organise things correctly - you need to be proactive with tax planning. Your IR35 status will significantly influence your tax strategy; it’s not a case of having any old tax strategy and assuming it will work equally well regardless of your IR35 status.

  • Contracting Outside IR35 - If you’re contracting outside IR35, you can structure your income tax-efficiently. You can do this by minimising tax by paying yourself a mixture of salary and dividends, and maximising your allowable expense claims.
  • Contracting Inside IR35 - If you’re contracting inside IR35, you're restricted to PAYE tax deductions. This means that dividends are off the table, and many tax-deductible costs are no longer claimable. There’s no way to use tax planning to your advantage to maximise your take-home pay.


Here’s How to Maximise Your Tax Efficiency Outside IR35

If you’re a contractor operating outside IR35, you’re in luck, as you can enjoy a number of tax-saving hacks.

  • With a Tax-Efficient Salary and Dividends - This is a commonly used method of maximising your take-home pay as a contractor, and it’s completely legal. By paying yourself a salary just above the NIC threshold, and taking the remainder as dividends, you benefit from a lower tax bill. This is because dividends are taxed at a lower rate than a standard salary.
  • By Claiming Allowable Expenses - As a contractor working outside IR35, you can claim allowable expenses. These include travel, equipment, software, business insurance, training - as long as it’s related to your business - and a portion of your home office if you work from home. By claiming these expenses, you reduce your taxable profit, and therefore reduce how much tax you need to pay at the end of the year.
  • By Grabbing Investment Opportunities - When you’re contracting outside IR35, you can take advantage of the investment opportunities that come your way. You can make strategic investments and pension contributions through your limited company, optimising long-term savings.


When used together, these strategies can help you significantly reduce your tax liability and increase your earnings, which you can then use to boost your take-home pay or reinvest back into the business.


Ensuring IR35 Compliance as a Limited Company Contractor

To benefit from the tax advantages of working as a limited company contractor, it’s important that your contracts support an outside IR35 status. Otherwise, HMRC might come to the conclusion that you’re actually working inside IR35 and should therefore be taxed as such, which you don’t want.


Make sure you have clear project-based work and documented contracts that reflect that, rather than ongoing roles, and you don’t have too much supervision or control from your client. It’s also important to show that you have autonomy over how, when and where you perform the work, as this shows that you are truly a contractor and not a remote employee.


This is why it’s a good idea to conduct regular IR35 assessments, as even minor changes in your contract or working relationship could change your status, without you even realising. Many contractors choose to work with an accountant or a limited company expert who understands the ins and outs of IR35. Taking IR35 seriously and tax planning is one of the best ways to remain compliant, whilst still maximising your earnings.


Avoiding Tax Implications of IR35: Can You Reduce Limited Company Tax? 

If you’re worried about overpaying on tax, you’re not alone. It’s something a lot of contractors struggle with, but there are legitimate and compliant ways to reduce your limited company’s tax bill, ways that HMRC are completely happy for you to take advantage of.

  • Optimise Your Salary - A lot of contractors choose to pay themselves just above the NIC threshold, as this enables them to maintain State Pension eligibility, whilst also reducing overall NIC payments.
  • Use Dividends Correctly - As dividends fall under a separate, lower tax band, paying some of your income this way helps you keep more money in your pocket.
  • Claim Allowable Business Expenses - Always keep records of things you buy for the business and claim for any legitimate business costs. Everything from mileage and software, to equipment and subscriptions are eligible expenses.
  • Make Pension Contributions - By making pension contributions, you can reduce your corporation tax and help to build long-term wealth. Though this doesn’t boost your income or savings now, it will come in useful when you’re nearing retirement age.


Why It’s Worth Working Outside IR35 as a Contractor

Though IR35 undoubtedly adds complexity to contracting, it doesn’t remove the benefits of operating through a limited company. If your contracts fall outside the scope of IR35, you can still contract in a tax-efficient, smart way. Working outside IR35 allows you to optimise your tax strategy through salary and dividend planning, retain more of your income, and claim business expenses to reduce your taxable profit. Plus, you can enjoy the greater financial control, flexibility and long-term potential that comes with owning your own business. 


As a limited company contractor, all financial decisions are down to you, which gives you the freedom to operate in a way that works best for you, your clients and your ongoing success.


Ready to Tackle IR35 as a Limited Company Contractor? Take the First Step with Go Limited

At Go Limited, we know how complicated IR35 can feel, which is why we support contractors at every stage of the journey. From setting up your limited company to staying compliant with evolving tax rules, we’re always on hand to help. If you’re ready to take control of your finances, setting up your limited company online is the quickest and most efficient way to get started. 


You’ll be working in a tax-efficient way before you know it. With the right planning and income structure, the tax implications of working outside IR35 can make a big difference to your contracting journey. 

accountant advising on IR35 compliance

FAQ's


How do you calculate tax and National Insurance for a limited company?

To calculate tax and NI for a limited company:

  • Corporation Tax is 25% on profits (after allowable expenses).
  • Employer’s NI (13.8%) applies to salaries above the secondary threshold.
  • Directors typically pay themselves through a mix of salary (subject to PAYE and NI) and dividends (taxed separately). Use an accountant or tax calculator to get an accurate figure.

How can I close a limited company without paying tax?

You can’t avoid tax legally, but you can minimise it. If the company has less than £25,000 in assets, you may qualify for a Members’ Voluntary Liquidation (MVL) or strike off, potentially benefiting from Business Asset Disposal Relief, which reduces Capital Gains Tax to 10%.


How much should I pay myself from my limited company to not pay too much tax?

A common strategy is to take a low salary (around the NI threshold, currently £12,570) and the rest as dividends up to the dividend allowance (£500 in 2025). This reduces Income Tax and NI exposure. Speak to an accountant to tailor this to your situation.


How much is corporation tax for a limited company?

The main rate of Corporation Tax in the UK is 25% for profits over £250,000. If your profits are under £50,000, the rate is 19%, and a tapered rate applies between those figures.


How do tax payments and tax returns work in the UK for a limited company?

  • Submit a Company Tax Return (CT600) annually to HMRC.
  • Pay Corporation Tax within 9 months and 1 day after your accounting year ends.
  • Also submit annual accounts to Companies House and possibly a Confirmation Statement.


How can I take money out of my limited company without paying tax?

You can't avoid paying tax. The most tax-efficient ways are:

  • Salary (within thresholds)
  • Dividends (up to £500 tax-free)
  • Director’s Loan Repayment (if previously loaned to the company)
  • Anything else may trigger Income Tax or Corporation Tax.


What are the tax liabilities for a limited company?

 Main tax obligations include:

  • Corporation Tax
  • VAT (if applicable)
  • PAYE/National Insurance (if employing staff or paying a director salary)
  • Business Rates and other sector-specific levies


What if a limited company closes without paying tax?

 HMRC can pursue directors personally if the closure was done fraudulently or negligently. Outstanding tax must be settled before closing, or creditors (including HMRC) may take legal action.


What should I give my accountant for a limited company tax return?

 Provide:

  • Bank statements
  • Invoices (sales and expenses)
  • Payroll records
  • VAT returns (if registered)
  • Previous accounts and tax filings
  • Any dividends or director’s loan information


Does a limited company pay Corporation Tax if it has loans to pay?

Corporation Tax is applied to profits, regardless of any loans. Loans are liabilities and do not decrease the profit used for tax calculations.


How do directors pay tax on dividends over the £500 allowance?

 As of 2025, dividend income over the £500 allowance is taxed at:

  • 8.75% (basic rate)
  • 33.75% (higher rate)
  • 39.35% (additional rate)
  • Dividends must be declared on a Self Assessment Tax Return.
personal service company
Speak to a Specialist

Important

 

Any rates and thresholds mentioned in this article are correct at the time of publishing and may be subject to change.

 

When choosing an accountant, look for one with proven experience and expertise in the contracting sector, particularly around areas like IR35, limited company tax matters and off-payroll working. Formal qualifications are important, but relevant hands-on knowledge matters just as much — especially in a complex and fast-changing landscape like this.

How Tax Works When You Set Up a Limited Company as a Contractor

April 15, 2026
How Tax Works When You Set Up a Limited Company as a Contractor For a lot of contractors in the UK, setting up a limited company is the most flexible, professional and - if you do things the right way - tax-efficient way to work. However, the tax responsibilities that come with running your own limited company are more complex than working as a sole trader, freelancer or under an umbrella company, which can complicate things ever so slightly. As a limited company contractor, you are both a company director and (usually!) a shareholder, which means tax applies at both company and personal levels. If you’re new to running a limited company, this will be a huge change to what you’re used to. At Go Limited , we know how important it is to understand how tax works when you set up a limited company as a contractor. In fact, it’s essential for staying compliant with HMRC and making informed financial decisions. Below, we’ve taken a look at how limited company tax works, what taxes you need to pay and the mistakes that commonly catch contractors out.

Closing a Limited Company: What You Need to Know

By Vita Martin • April 15, 2026
Closing a Limited Company What You Need to Know There’s a lot to love about running a limited company. You have the flexibility of managing your workload and being your own boss, and the freedom to run your business in a way that works for you. But, regardless of the advantages, there might come a time when you’re ready for something new. Whether you’re heading back to full-time employment, retiring or deciding to pursue a new profession, having a limited company doesn’t have to hold you back, but you will need to draw things to a close beforehand. At Go Limited , we know how much effort goes into setting up a limited company, and we know deciding to close doesn’t come easily. Once you’ve made the decision, you probably want things to move along relatively quickly, which is why you need to know how to close things down properly.

Are Contractor Accountants Worth the Cost?

By Vita Martin • April 15, 2026
Are Contractor Accountants Worth the Cost?  As a contractor, you’re probably used to doing a lot of things yourself. You run your own business, manage your own workload and decide which projects to take on. Whether you’re a sole trader, freelancer or contractor operating through a limited company, you are in control. However, this can become a burden when it comes to business finances. Unless you have a fair amount of experience with managing business accountants, keeping on top of expenses and planning for tax, everything can spiral into a huge stress. At Go Limited , we understand the appeal of handling everything yourself as a contractor. But, if you want to truly dedicate time to your business, clients and professional growth, it’s likely that something needs to be delegated. More often than not, it makes sense for this to be accounting. This is where contractor accountants come in.

Selecting the Right Accountant for IT Contractors

By Vita Martin • April 15, 2026
Selecting the Right Accountant for IT Contractors Regardless of the specific IT services you provide, how long you’ve been contracting for and how experienced you are at managing your own business, the idea of hiring an accountant has probably come up. When you consider the time, stress and energy that goes into contracting accounting, it’s easy to see why many contractors don’t want to take a do-it-yourself approach. Though there’s nothing wrong with DIY accounting as an IT contractor, it’s a lot easier if you hand everything over to a professional. But, you can’t enlist the help of the first person you find. At Go Limited , we know how daunting it can be to put your accounting, bookkeeping, tax and expenses into someone else’s hands. That’s why we help you to find an accountant you can really rely on. To get the most out of working with an expert, you need to select the right accountant for IT contractors.

How to Reduce the Risk of a Tax Investigation

By Vita Martin • April 15, 2026
How to Reduce the Risk of a Tax Investigation There are a lot of reasons to become a contractor. Whether you decide to approach contracting as a sole trader or set up a limited company, there are a lot of benefits to doing so. But, there’s one thing that holds some people back - the risk of a tax investigation. At Go Limited , we know the idea of undergoing a tax investigation is enough to fill you with dread. But, what if we told you it’s nothing to worry about? Armed with the right information and an idea of how to reduce the risk of an investigation, you can throw yourself into contracting without a second thought. As long as you stay on the right side of HMRC, a tax investigation isn’t something you need to worry about.

Expense Tracking Tools for Contractors

By Vita Martin • April 15, 2026
Expense Tracking Tools for Contractors There are a lot of financial benefits that come with running a limited company as a contractor. But, there’s also a lot of responsibility, especially when it comes to bookkeeping and accounts. For a contractor with a limited company, one of the key areas to pay attention to is expenses. When done properly, expense tracking can reduce your Corporation Tax bill in a considerable way, ensuring you claim every allowable business cost. However, expense tracking is often overlooked, which can lead to missed tax reductions, confusing accounts and potential issues with HMRC. At Go Limited , we’ve seen for ourselves how important expense tracking is and why having a limited company expenses spreadsheet isn’t enough. Below, we’ve taken a look at the tools limited company contractors commonly use, and we’ve shared some of top tips to help stay organised, compliant and on top of expense tracking.

What Expenses Can You Claim as a Limited Company Director?

By Vita Martin • April 15, 2026
What Expenses Can You Claim as a Limited Company Director? There’s nothing quite as rewarding as running your own business, especially if you’ve gone from being a sole trader or freelancer, to a contractor who’s set up your own limited company. Being a limited company director gives you a lot of flexibility, control, and the opportunity to grow your business on your own terms. But, with that freedom comes responsibility, especially when it comes to managing finances and understanding what expenses you can claim. At Go Limited , we’ve seen even the most experienced limited company directors miss out on tax savings because they’ve forgotten to claim tax deductible expenses, and we’ve seen others get dangerously close to HMRC penalties for claiming the wrong thing. Below, we’ve taken a deep dive into what you can and can’t claim as a limited company director.

How Contractors Can Reduce Overheads — Without Risking Quality

By Vita Martin • April 15, 2026
How Contractors Can Reduce Overheads — Without Risking Quality Running your own business can be incredibly rewarding; you’re in charge of your workload, your clients, the projects you take on and the way your business is managed. But, with that comes responsibility and one of the biggest challenges contractors face is keeping overheads under control, whilst also making sure service quality doesn’t suffer. At Go Limited , we know that overheads are inevitable in any business, but that doesn’t mean they should eat into your profits. We’ve taken a look at how you can reduce overheads, without compromising quality.

Why Budgeting Matters for Contractors

By Vita Martin • April 15, 2026
Importance of budgeting for contractors The world of contracting is evolving, with more and more professionals realising the benefits of being a self-employed, ‘be your own boss’ worker. There’s freedom and flexibility, and a number of financial benefits to enjoy. But, that’s only the case if you keep on top of things. Though your focus is likely to be on completing projects, speaking to clients and business growth, you do need to think about the financial side of things. This includes expense management, an area that relies heavily on budgeting. At Go Limited , we know that budgeting and expense management aren’t the most exciting parts about being a contractor. We know that you didn’t set up a limited company because you wanted more paperwork to deal with. But, we also know that limited company expenses are how you operate in a tax-efficient, compliant and organised way. To take full advantage, you need to understand the role of budgeting in expense management, and what that means for you as a contractor.

Managing Unexpected Expenses in Your Limited Company

By Vita Martin • April 15, 2026
Managing Unexpected Expenses in Your Limited Company It doesn’t matter if you’re a pro at managing your limited company and you’ve got a lot of years’ experience behind you, you’re still going to face unexpected costs. This is the case regardless of industry, market or sector, and both internal and external factors can be to blame. Without warning, you could be faced with an expense you haven’t planned for, leaving you struggling to come up with the cash. At Go Limited , we’re here to make your life easier, so check out our expert advice on managing unexpected expenses as a limited company contractor.
More Posts