Accounting for Contractors: A Limited Company Guide
Most UK contractors operate through a personal service company (PSC) — a private limited company where the contractor is both director and sole shareholder. The limited company structure offers flexibility and tax efficiency, but it also brings accounting and compliance obligations that sole traders do not face.
This guide explains the key accounting tasks every contractor-director needs to understand: from tracking expenses and running payroll to filing your company tax return and handling IR35.
If you work as a contractor through a limited company, you must file annual accounts with Companies House, submit a company tax return (CT600) to HMRC, and run payroll for any salary you pay yourself. This guide covers all the accounting essentials for contractors — without the jargon.
Key takeaways
- Contractors using a limited company are both directors and shareholders — your income split between salary and dividends has a significant effect on your overall tax bill
- All allowable business expenses must be recorded with receipts; poor records mean you pay tax on costs that could have been deducted
- IR35 is assessed contract by contract — a single determination affects one engagement, not your whole company
- You must file accounts with Companies House and a CT600 with HMRC each year — they are separate filings with different deadlines
- Set aside money for corporation tax from the moment you start earning; payment is due 9 months and 1 day after your accounting period ends
How does a contractor limited company work?
A contractor limited company is typically a one-person private limited company where the director provides professional services to clients through the company rather than as a direct employee. The company invoices clients, receives payments, pays business expenses, and then pays the director a salary and/or dividends from the remaining profit.
This is legally distinct from being a sole trader. As a director, you are separate from your company — the company owns its income, pays its own corporation tax, and has its own filing obligations with HMRC and Companies House. See sole trader vs limited company if you are still deciding which structure suits you.
Most contractors are also the sole director and shareholder of their company, which keeps governance simple.
Salary versus dividends: the contractor's core tax decision
One of the main reasons contractors choose a limited company is the ability to split income between salary and dividends. Corporation tax is paid on company profits; dividends paid from post-tax profits attract dividend tax rates rather than income tax and National Insurance on salary.
A common approach:
- Pay yourself a salary at or near the National Insurance primary threshold, qualifying for NI credits while minimising NI costs
- Take additional income as dividends from the company's post-tax profit
- Leave surplus funds in the company for future extraction or investment
Important: taking money from your company in ways that are not salary or dividends — paying personal bills through the company, for example — creates a Director's Loan Account. Loans not repaid within 9 months of your accounting year-end attract an additional corporation tax charge (S455 tax), which is recoverable once the loan is repaid. Keep the Director's Loan Account clear wherever possible.
What expenses can contractors claim?
The rule is that an expense must be incurred "wholly and exclusively" for business purposes to be deductible. Common allowable expenses for contractors include:
Equipment and technology
- Computers, monitors, and peripherals used for work
- Specialist tools or equipment for your trade
- Mobile phones used primarily for business
- Business travel costs (not regular commuting to a single fixed workplace)
- Hotel accommodation when working away from home overnight
- Subsistence costs when away from your normal place of work
- Professional indemnity and public liability insurance
- Accountancy and bookkeeping fees
- Professional memberships and subscriptions relevant to your work
- Project management, design, and productivity software
- Cloud storage and business communication tools
- Accounting software
- Courses and qualifications that develop skills in your existing trade (not retraining for a different career)
- If you work from home, a proportion of household bills may be deductible. The rules are specific — seek advice before claiming significant home office costs.
What is IR35, and how does it affect contractors?
IR35 (the off-payroll working rules) is legislation designed to prevent contractors from using a limited company to avoid employment taxes when their actual working arrangements are, in substance, employment.
When IR35 applies to a contract:
- PAYE income tax and National Insurance must be accounted for as if the contractor were employed
- Most of the tax efficiency of the limited company structure is eliminated for that engagement
- Your company still pays corporation tax on its profits, but the income available to distribute as dividends is significantly reduced
Who determines IR35 status?
- For small end clients (below the off-payroll threshold): you assess your own status via your own determination
- For medium and large end clients (public sector, and private sector clients above the threshold): the end client determines status and issues a Status Determination Statement
Setting up payroll for your salary
If you pay yourself a salary — even a modest one — you must register your company as an employer with HMRC and operate PAYE under Real Time Information (RTI). This means submitting a Full Payment Submission (FPS) to HMRC each time you pay yourself.
You must also submit an Employer Payment Summary (EPS) in months where you make no payment. Most contractors use basic payroll software or delegate to their accountant.
If your salary is below the National Insurance secondary threshold and you have no other employees, you may owe little or no employer's NI — but the payroll submissions are still legally required.
Filing your annual accounts and tax return
As a limited company director, you must file statutory accounts with Companies House and a company tax return (CT600) with HMRC each year. These are separate filings to different government bodies with different deadlines. See Companies House vs HMRC: understanding both filings.
Key annual deadlines:
| Filing | Deadline |
|---|---|
| Pay corporation tax | 9 months + 1 day after accounting period ends |
| File Companies House accounts | 9 months after accounting reference date |
| File CT600 with HMRC | 12 months after accounting period ends |
| File confirmation statement | Within 14 days of your confirmation date |
How much corporation tax will I owe?
Corporation tax is charged on your company's taxable profits — broadly, income minus allowable expenses, including any salary you pay yourself. The applicable rate depends on your profit level; check GOV.UK corporation tax rates for current figures.
For most small contractor companies, the key discipline is maintaining a dedicated savings pot for corporation tax from day one. See how much to set aside for tax as a limited company for a practical monthly percentage guide.
Bookkeeping for contractor companies
Good bookkeeping underpins all your tax filings and expense claims. Maintain at minimum:
- A record of all sales invoices raised to clients
- A record of all business expenses with supporting receipts or invoices
- Bank statements reconciled to your records
- Records of all salary and dividend payments
- Director's Loan Account movements if you take informal drawings
Frequently Asked Questions
Do I need an accountant as a contractor?
No — there is no legal requirement. Many contractors with straightforward affairs (one company, no employees other than themselves, standard expenses) file their own accounts and CT600 online. However, the salary/dividend split, IR35 status assessments, VAT decisions, and first-year setup can be complex enough to make an accountant worthwhile — particularly if your contracts involve medium or large clients where off-payroll rules apply.
Can I claim my home as an office expense?
If you work from home, you can claim a proportion of heating, electricity, broadband, and mortgage interest or rent. HMRC publishes simplified flat-rate allowances as an alternative to calculating actual costs. HMRC scrutinises substantial home office claims — keep clear records and seek professional advice if claiming significant amounts.
What is a Director's Loan, and why does it matter?
A Director's Loan is money taken from the company that is not salary or dividends. If the loan is not repaid within 9 months of the accounting year-end, the company must pay S455 tax on the outstanding balance (check GOV.UK for the current rate). This tax is recoverable once the loan is cleared. Keep the Director's Loan Account monitored in your bookkeeping records to avoid unexpected tax charges.
When should I register for VAT as a contractor?
Once your company's taxable turnover reaches the VAT registration threshold, registration is compulsory — check the current threshold on GOV.UK. Many contractors register voluntarily before the threshold, particularly where their clients are VAT-registered businesses that can reclaim the VAT charged.
How does IR35 affect my bookkeeping and accounts?
If a contract is inside IR35, you or your accountant must calculate a deemed employment payment and account for PAYE and National Insurance on it. Your company's corporation tax calculation is adjusted accordingly. Keeping clear records of which contracts are inside and outside IR35 is essential — mixing up the treatment leads to errors in both payroll filings and your CT600.
Summary
Accounting for a contractor limited company involves more than tracking expenses. You need to manage payroll, balance salary and dividends to optimise your tax position, assess IR35 for each contract, and meet separate annual deadlines for HMRC and Companies House. Getting the bookkeeping right from day one keeps all of this manageable and ensures you are never underprepared at year-end.