The 2026/27 tax year introduces several important considerations for UK contractors. The correct treatment depends on whether you operate as a sole trader, through a personal service company, or through an umbrella company.
This guide summarises ten areas contractors should review during 2026. It is general information only and is not personal tax advice. Tax rules can change, and the correct approach depends on your income, contracts, business structure and individual circumstances.
1. Check whether Making Tax Digital applies to you
Making Tax Digital for Income Tax Self Assessment is being introduced in stages for sole traders and landlords.
If your qualifying self-employment or property income was more than £50,000 for the 2024/25 tax year, you should have started using Making Tax Digital from 6 April 2026. The threshold is scheduled to reduce to:
- More than £30,000 of qualifying income from 6 April 2027
- More than £20,000 of qualifying income from 6 April 2028
Affected contractors must keep digital records and submit quarterly updates using compatible software. They will also need to complete an End of Period Statement and a Final Declaration.
Do not assume that HMRC will contact you before you need to act. Review your qualifying income and digital record-keeping requirements in advance.
KKB Accounting Ltd provides support with MTD and ITSA, including reviewing your records, software and upcoming reporting obligations.
2. Review every contract under IR35
The off-payroll working rules, commonly known as IR35, continue to be a major issue for contractors operating through a limited company.
IR35 applies where a contractor would have been treated as an employee if they had provided their services directly to the end client. The assessment is based on the actual working relationship, not simply the wording of the contract.
Relevant factors can include:
- Whether you have the right to provide a substitute
- The degree of control exercised by the client
- Whether there is an ongoing obligation to provide or accept work
- Your financial risk and responsibility for correcting work
- Whether you operate independently from the client
For medium and large private-sector clients, the client will normally determine your employment status and provide a Status Determination Statement. For a small private-sector client, responsibility generally remains with the contractor’s intermediary.
IR35 applies on a contract-by-contract basis. One contract may be outside the rules while another is inside them. Keep contracts, statements of work, correspondence and evidence of your working practices.
3. Claim only genuine allowable business expenses
Allowable expenses can reduce taxable profits, but the expense must be incurred wholly and exclusively for the business.
Depending on your circumstances, relevant costs may include:
- Accounting and bookkeeping fees
- Professional subscriptions
- Business insurance
- Specialist software and online services
- Work equipment
- Telephone and internet costs relating to business use
- Business travel and accommodation
- Training that maintains or updates existing professional skills
Personal expenditure is not automatically allowable because it supports your work. Where an expense has both business and personal use, only the appropriate business proportion may qualify.
Keep a receipt, invoice or other supporting evidence for every claim. A clear explanation of the business purpose is also useful, particularly for travel, equipment and professional development costs.
Contractors working inside IR35 may face more restricted expense relief than those operating outside IR35. This is one reason why status and expense treatment should be reviewed together.
4. Consider pension contributions as part of your tax planning
Pension contributions can support long-term financial planning while also attracting tax relief within the relevant limits.
For most private pension arrangements, tax relief is generally available on contributions up to the lower of:
- 100% of relevant UK earnings for the year
- The annual allowance, which is currently £60,000 in many cases
Unused annual allowance from earlier years may sometimes be carried forward, subject to the applicable rules.
A limited company may also make employer pension contributions for its director. The company’s contribution, the timing and the amount should be reviewed as part of the company’s accounts and Corporation Tax position. Contributions must be considered carefully and should be appropriate for the business.
Pension planning can also be relevant where a contractor has income approaching a higher tax band or is trying to manage the impact of dividend income. Obtain regulated financial advice where you need recommendations about pension products or investments.
5. Monitor VAT turnover and registration requirements
The VAT registration threshold remains £90,000 of taxable turnover. You must monitor your taxable turnover over a rolling 12-month period.
You may need to register if:
- Your taxable turnover goes above £90,000 in the previous 12 months
- You expect your taxable turnover to exceed £90,000 in the next 30 days
You can also register voluntarily below the threshold, although this should be considered alongside your clients, pricing and administration.
Most contractor services are charged at the standard 20% VAT rate once registered. You must issue compliant invoices, keep VAT records and submit VAT Returns through Making Tax Digital for VAT.
If you provide services to clients outside the UK, or buy services from overseas suppliers, place-of-supply and reverse-charge rules may apply. These rules can be complex, so international contracting arrangements should be checked before invoices are issued.
KKB Accounting Ltd can help with VAT returns and VAT record keeping.
6. Separate business travel from ordinary commuting
Travel is a common area of uncertainty for contractors.
Travel to a temporary workplace may qualify as business travel where the relevant conditions are met. Ordinary commuting to a permanent workplace is generally treated differently and is not normally an allowable business expense.
Keep a detailed mileage log showing:
- Date of the journey
- Starting point and destination
- Business purpose
- Number of business miles
- Vehicle used
- Amount reimbursed or claimed
If your company provides a vehicle for private use, a taxable benefit may arise. Company car treatment depends on factors such as the vehicle’s list price, CO₂ emissions, fuel type and private availability. Private fuel can create a separate benefit.
Do not choose a company car solely on the assumption that it will reduce tax. Compare the company, personal and cash-flow consequences before making a decision.
7. Review Corporation Tax and dividend extraction
For limited companies, Corporation Tax is normally charged at:
- 19% where taxable profits are £50,000 or less
- 25% where taxable profits exceed £250,000
- A marginal rate where profits fall between these limits
The thresholds may be reduced where a company has associated companies.
Dividends are paid from profits after Corporation Tax and must be supported by sufficient distributable reserves. A company should not declare dividends simply because there is money in its bank account.
From 6 April 2026, dividend tax rates are:
- 10.75% for basic-rate taxpayers
- 35.75% for higher-rate taxpayers
- 39.35% for additional-rate taxpayers
The dividend allowance remains £500.
For many contractor-owned companies, the balance between salary, dividends, pension contributions and retaining funds in the company requires regular review. The most tax-efficient approach is not identical for every contractor.
8. Reconsider home-working claims
The tax treatment of home working changed from 6 April 2026.
The previous employee claim for a flat-rate £6 per week of additional household expenses is no longer generally available as a personal claim for the 2026/27 tax year.
A company may still be able to provide equipment or reimburse qualifying additional household costs where the relevant conditions are met. The expense should be supported by evidence and should relate to the business requirement to work from home.
For limited-company contractors, it is important to distinguish between:
- Equipment purchased and owned by the company
- Costs reimbursed by the company
- Personal household costs
- Private use of business equipment
Document the arrangement clearly and avoid claiming the same cost twice.
9. Maintain complete and accessible records
Good records are essential for tax compliance, cash-flow planning and defending claims during an HMRC enquiry.
Your records should normally include:
- Sales invoices and credit notes
- Bank statements
- Receipts and supplier invoices
- Contracts and statements of work
- Mileage logs
- Payroll records
- VAT calculations
- Pension contribution details
- Dividend paperwork
- Details of assets and equipment
- Evidence supporting business expenses
Sole traders must keep records for Self Assessment. Limited companies have separate company and accounting record requirements. Digital records should be backed up securely and retained for the required statutory period.
Monthly bookkeeping is usually more effective than attempting to reconstruct a full year shortly before a filing deadline. KKB Accounting Ltd offers paperless bookkeeping support for owner-managed businesses and contractors.
10. Plan around the main reporting deadlines
Contractors should maintain a calendar covering all relevant personal and business deadlines.
Important dates can include:
- 5 October: deadline to notify HMRC if you need to register for Self Assessment for the previous tax year
- 31 October: deadline for a paper Self Assessment return
- 30 December: deadline for an online return if you want tax collected through your PAYE tax code, where eligible
- 31 January: deadline for an online Self Assessment return and payment of tax due
- 31 July: second payment on account deadline, where applicable
- Corporation Tax payment: normally due nine months and one day after the end of the accounting period
- Company Tax Return: normally due 12 months after the end of the accounting period
- VAT Returns: due according to your VAT accounting period
- Payroll submissions: Full Payment Submissions are generally due on or before the payment date
Making Tax Digital users will also need to plan for quarterly updates and year-end submissions. The exact timetable depends on the relevant tax year and reporting obligations.
How KKB Accounting Ltd can help
Contractor tax planning involves more than submitting a tax return. Your business structure, contract terms, expenses, VAT position, pension contributions and dividend decisions should work together.
KKB Accounting Ltd can help contractors and owner-managed businesses with bookkeeping, accounts, payroll, VAT, tax returns and Making Tax Digital preparation.
Hi! If you would like to discuss your position, please contact us:
Email: info@kkbaccounting.co.uk
Phone: 0116 373 0228
WhatsApp: 07926470457
Please provide details of whether you operate as a sole trader, through a limited company or through an umbrella company. We can then discuss the records and support relevant to your circumstances.
This article is for general information only and does not constitute personal tax, accounting, legal or financial advice. Tax treatment depends on individual circumstances and legislation may change. Please obtain advice based on your own position before taking action.
