17 February 2026 · 7 min read · Bruce Thomas
Contracting rewards people who are good at their trade and punishes people who are careless with administration. The tax rules are not especially difficult, but they are unforgiving and they have changed repeatedly.
Status comes first
Everything else follows from whether an engagement falls inside or outside IR35. Where the end client is a medium or large private sector business, or any public sector body, the client makes the determination and must provide a status determination statement.
Working practices matter more than contract wording: substitution, control and mutuality of obligation are what get examined in practice.
Structure
Outside IR35 and earning above the higher-rate threshold, a limited company is usually the more efficient structure. Inside IR35, most of that advantage disappears and an umbrella arrangement may be simpler and no worse off.
The right answer changes with rate, duration and whether you have gaps between contracts — it is worth reviewing rather than assuming.
Expenses
The 24-month rule is where site-based contractors most often go wrong: once an engagement at one location is expected to exceed two years, travel relief stops.
- Travel to a temporary workplace, subject to the 24-month rule
- Subsistence on qualifying business journeys
- Equipment, tools and protective clothing
- Professional subscriptions and required training
- Home office costs where there is a genuine business use
- Accountancy and business insurance
Reserving for tax
Contract income is lumpy and tax is not. Move a fixed percentage of every payment into a separate account the day it arrives. The precise percentage depends on your extraction mix, and we set it with clients rather than leaving it to guesswork.
CIS contractors
If you work within construction, 20% or 30% will be deducted at source. Companies offset those deductions against PAYE liabilities; sole traders reclaim through Self Assessment. Filing promptly after 6 April is the fastest route to a refund.
This article is general guidance for business owners in the UK and does not amount to advice for your particular circumstances. Tax rules change and the right answer depends on your figures — please take specific advice before acting.
