How independent consultants are taxed
- Engagement-by-engagement IR35 status - each contract is assessed separately. Genuine multi-client advisory work is typically outside IR35.
- Limited company taxation - company turnover, deduct allowable expenses, deduct salary, pay Corporation Tax (19-25%) on remaining profit.
- Personal extraction - take a small salary (typically the personal allowance amount) plus dividends.
- Dividend taxation - £500 dividend allowance, then 8.75% basic, 33.75% higher, 39.35% additional rate.
Allowable expenses for consultants
- Travel to client sites (not commute to a regular workplace)
- Subsistence on overnight client engagements
- Professional indemnity insurance (often required by client contracts)
- Professional body memberships (CMI, IoD, ICAEW, MBA alumni)
- Subscription tools used for client work (research databases, design software, etc.)
- Training to maintain existing skills (not learning new trades)
- Home office (£26/month flat rate or apportioned actual costs)
- Marketing - website, content production, paid advertising
- Subcontractor fees for specific project work
- Conference attendance and business networking
Pension - the highest-leverage extraction route
Director SIPP contributions paid by the company are exceptionally tax-efficient for consultants:
- Company gets a Corporation Tax deduction (so 19-25% saving on the contribution amount)
- No employer NI on pension contributions
- No personal Income Tax until withdrawal in retirement
- £60K annual allowance for most consultants (tapered for very high earners)
For consultants who can leave money in the company, maxing the pension before paying higher-rate dividends is almost always the right call.
Frequently asked questions
How is IR35 different for consultants vs contractors?+
The same legal tests apply (control, substitution, mutuality of obligation), but the actual working relationship differs. A genuine advisory consultant typically controls their own methods, has multiple concurrent clients, and is engaged for outcomes rather than time. These factors weigh toward outside IR35.
Can I leave profit in the company?+
Yes - retained profits sit in the company and pay Corporation Tax once. You can take them out later as dividends (taxed personally then) or use them for company pension contributions, future salary, or business investment.
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