Katy Proctor
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London is one of the most significant technology hubs in Europe, and the limited companies driving that position, software developers, IT consultancies, managed service providers, SaaS businesses, cybersecurity firms, digital agencies and technology contractors, operate in one of the most financially complex environments in UK business.
R&D tax credits have been reshaped by the merger of the SME and RDEC schemes into a single regime for accounting periods beginning on or after 1 April 2024. IR35 has seen significant threshold changes from April 2026, shifting responsibility for status determinations back to thousands of personal service companies. VAT on digital services, the treatment of software development costs, and salary and dividend strategy for technology founders all require an accountant who understands the sector — not one working from a generic small business template.
This guide is written for limited company IT and technology businesses in London in 2026. It covers the tax landscape, the planning decisions that make a material difference, and where a specialist accountant approaches your business differently from a generalist firm.
A generalist accountant sees a technology company as a service business. A specialist sees the R&D opportunities, the IR35 risks, the software accounting questions, and the growth structuring decisions that make a material difference.
London technology companies — from one-person IT contractors to ten-person software development studios to fifty-person managed service providers — share a set of financial complexity that general practice accountants consistently underserve.
A specialist technology accountant understands:
How to identify qualifying R&D expenditure within a software or IT company's costs — including staff time spent on genuinely uncertain technical challenges, software tools used in qualifying activity, subcontractor costs, and the dividing line between qualifying innovation and routine development work.
How IR35 applies to IT contractors and technology consultancies — and the significant threshold changes that took effect from April 2026, which shifted responsibility for status determinations back to personal service companies engaged by newly-reclassified small clients.
How software development costs should be treated in the accounts — the distinction between capitalising development costs as intangible assets and expensing them immediately, and how that decision interacts with R&D claims and the tax position.
How VAT applies to digital services — including the place of supply rules for B2B and B2C digital service sales, the VAT treatment of software licences, and the implications of selling into other jurisdictions.
The cumulative impact of getting all of this right — R&D claims filed correctly, IR35 managed proactively, software accounting handled properly — is measured in tens of thousands of pounds annually for a typical London technology company. Getting it wrong carries penalties, compliance exposure, and the risk of HMRC enquiries that consume management time at precisely the point when a growing technology business needs its founders focused elsewhere.
Pulse Accountants works exclusively with limited companies. Technology is one of our strongest sectors, and we work with IT and technology businesses across London and the rest of the UK from our offices in London, Newcastle and Newton Aycliffe.
The UK's R&D tax relief system underwent its most significant reform in two decades for accounting periods beginning on or after 1 April 2024. The previous two-track system — with separate SME and RDEC schemes — has been replaced by a single merged scheme, alongside a separate enhanced relief for qualifying loss-making SMEs.
Understanding which scheme applies, what you can claim, and how the relief is calculated is essential for any London IT or technology company spending money on innovation.
Under the merged scheme, all companies — regardless of size — claim a Research and Development Expenditure Credit (RDEC) at a rate of 20% of qualifying R&D expenditure. This credit is treated as taxable income above the line in the company's accounts, meaning it appears in profit before tax.
After Corporation Tax is applied to the credit, the net benefit to a profit-making company paying Corporation Tax at 25% is approximately 15% of qualifying expenditure — meaning for every £100,000 of qualifying R&D spend, the effective net benefit is around £15,000 after tax. For companies paying Corporation Tax at the small profits rate of 19%, the net benefit is approximately 16.2% of qualifying expenditure.
Loss-making companies can receive the credit as a cash payment from HMRC, subject to the PAYE and NIC cap — which limits the payable credit based on the company's payroll tax liabilities.
The Enhanced R&D Intensive Support (ERIS) scheme is available to loss-making SMEs whose qualifying R&D expenditure represents at least 30% of their total expenditure. For accounting periods beginning on or after 1 April 2024, this 30% intensity threshold applies.
ERIS provides a significantly higher effective benefit than the merged RDEC scheme — up to approximately 27% of qualifying expenditure as a non-taxable credit. For early-stage technology and software companies that are loss-making while investing heavily in product development, ERIS can be a materially important source of cash.
A London software startup spending the majority of its costs on engineering salaries and development tools, running at a loss while building its product, may well meet the 30% intensity threshold — making the ERIS route significantly more valuable than the standard merged scheme.
The merged scheme is less generous than the old SME R&D tax relief scheme for profit-making SMEs. Under the old SME scheme, profit-making companies could claim an enhanced deduction of 186% of qualifying costs — generating a net benefit of up to approximately 21.5% of qualifying expenditure. Under the merged scheme, the net benefit for a profit-making SME paying 25% Corporation Tax is approximately 15%.
If your company has been claiming under the old SME scheme for accounting periods before 1 April 2024, and has since moved into accounting periods that fall under the merged scheme, the calculation and the claim process has changed and needs to be reviewed.
This is the question that determines whether a technology company has a valuable R&D claim or no claim at all — and it is one of the areas most commonly handled incorrectly, in both directions. Some IT companies file large R&D claims on routine development work that does not qualify. Others do genuinely qualifying work and claim nothing because they assume R&D tax credits are for pharmaceutical companies or hardware engineers, not software teams.
The correct legal test is whether the company is seeking an advance in overall knowledge or capability in a field of science or technology, and whether that advance involves the resolution of scientific or technological uncertainty — uncertainty that a competent professional in the field could not readily resolve using existing knowledge.
Qualifying R&D activities in the technology sector tend to include:
Developing new algorithms, data processing methods, or computational approaches where the outcome is technically uncertain at the outset.
Building software that integrates disparate systems in a technically novel way — where the integration challenge involves genuine technical uncertainty, not just configuration or customisation work.
Creating new artificial intelligence models, machine learning pipelines, or natural language processing capabilities where the technical approach is not already established practice.
Developing new cybersecurity tools, threat detection methods, or encryption approaches that advance beyond existing published techniques.
Building novel cloud infrastructure, distributed computing systems, or performance engineering solutions where the technical challenge is genuinely unresolved by existing knowledge.
The areas most commonly challenged by HMRC in IT R&D claims include:
Routine software development — building features using established frameworks, languages and approaches where there is no technical uncertainty.
Website development — unless it involves genuinely novel technical challenges, standard web development using existing tools and platforms does not qualify.
Customisation and configuration — adapting existing software or platforms to meet a client's requirements, even if complex, does not constitute R&D if it uses established methods.
Business analysis, project management and administrative time — these do not qualify even if they relate to an R&D project.
HMRC's scrutiny of R&D claims in the technology sector has intensified significantly since 2022. Claims that are vague, based on routine development activity, or submitted without adequate technical narrative are being challenged and rejected at an increasing rate. Getting the claim right — with a clear technical narrative, a properly documented project-by-project analysis, and accurate staff time allocation — is essential.
IR35 is the UK tax legislation that determines whether a contractor working through a limited company — a Personal Service Company (PSC) — should be taxed as self-employed or as a deemed employee for a given engagement. IT contractors represent one of the largest groups affected by IR35, and getting the status wrong has significant financial consequences.
A contractor working outside IR35 through a limited company can draw income through a tax-efficient combination of salary and dividends, and the company pays Corporation Tax on its profits. A contractor caught inside IR35 is treated as a deemed employee — PAYE and National Insurance are deducted from their income as if they were employed, but without receiving any of the employment rights that come with employment.
HMRC assesses IR35 status based on the actual working relationship, not just the contract wording. The three core tests are:
Control — does the client control how, when and where the contractor works? If the client dictates working hours, location and methodology in the way an employer would, this points toward employment.
Substitution — can the contractor genuinely send a qualified substitute to do the work if they are unavailable? A genuine, unfettered right of substitution is a strong indicator of self-employment.
Mutuality of obligation — is the client obliged to offer work and the contractor obliged to accept it? Ongoing mutuality of obligation more closely resembles employment than a series of discrete project engagements.
No single test is determinative. HMRC looks at the overall picture of the working relationship.
From 6 April 2026, the financial thresholds defining a "small" client — and therefore determining who is responsible for making the IR35 status determination — increased significantly.
The new thresholds for a client to qualify as small are: annual turnover not exceeding £15 million (increased from £10.2 million), balance sheet total not exceeding £7.5 million (increased from £5.1 million), and no more than 50 employees (unchanged). A company qualifies as small if it meets at least two of these three criteria.
Where a client qualifies as small, the responsibility for IR35 status determination sits with the contractor's PSC — not with the client. Where the client is medium or large, the client is responsible for issuing a Status Determination Statement.
The practical effect of the April 2026 threshold increase is that approximately 14,000 businesses were reclassified from medium to small, shifting IR35 determination responsibility back to the contractors' PSCs for those engagements. However, because IR35 size tests operate by reference to the previous financial year's accounts, the practical impact for many contractors may not be felt until April 2027.
If you are an IT contractor working through a limited company and one of your clients has been reclassified as small as a result of the April 2026 threshold changes, you are now responsible for determining your own IR35 status for that engagement. You need a current written assessment for each active engagement, documentation to support it, and a clear understanding of whether your working practices support an outside-IR35 position.
Continuing to assume an engagement is outside IR35 because a client previously issued a favourable SDS — without reviewing whether that determination is still valid and who now holds responsibility — is a compliance risk that needs to be addressed proactively.
The VAT threshold remains at £90,000 of taxable turnover in any rolling 12-month period. London IT and technology companies — particularly those scaling quickly, running subscription models, or working on project-based contracts — can cross this threshold faster than expected.
Once registered, the VAT treatment of a technology company's income is not always straightforward.
Software licences, SaaS subscriptions, and digital services are subject to standard rate VAT at 20% when supplied to UK customers. For B2B sales to VAT-registered UK businesses, the customer can recover the VAT — making the charge commercially neutral between registered businesses.
The complexity arises in several situations that are common in London technology companies:
Mixed supplies — where a contract bundles software, implementation, support, and training together. Each element may have a different VAT treatment depending on whether the contract is treated as a single composite supply or multiple separate supplies.
Supplies to international customers — the place of supply rules for digital services determine where VAT is due. For B2B supplies to business customers in other countries, the reverse charge mechanism typically applies, meaning the customer accounts for VAT in their jurisdiction and you do not charge UK VAT. For B2C supplies to consumers in EU member states, the EU One Stop Shop (OSS) rules may apply.
Grant-funded development work — where a technology company receives grant funding that is outside the scope of VAT, care is needed to ensure the partial exemption calculation is handled correctly and input VAT recovery is not overclaimed.
Inter-company charges within a group — technology companies with group structures need to ensure that management charges and shared service allocations are VAT-compliant and correctly documented.
For a technology company director operating through a limited company, the most tax-efficient structure typically involves a combination of a director's salary and dividends — taking advantage of Corporation Tax rates on company profits and the lower personal tax rates on dividend income compared to employment income.
For 2026/27, the dividend allowance is £500 — the first £500 of dividend income each individual receives is tax-free. Above that, dividends are taxed at 10.75% for basic rate taxpayers, 35.75% for higher rate taxpayers, and 39.35% for additional rate taxpayers.
Income between £100,000 and £125,140 is subject to a 60% effective marginal rate of income tax in 2026/27, because the personal allowance of £12,570 is withdrawn at £1 for every £2 of income above £100,000. This creates a band in which every £2 of additional personal income generates 40% tax on those earnings plus the loss of £1 of personal allowance that would otherwise shelter income from tax.
For a London technology founder whose salary plus dividends lands in this range — particularly common as a software business scales past the point where the director takes a meaningful income — planning personal drawings to stay below £100,000 or to clear the band entirely can make a material difference to the annual tax bill.
This requires planning through the year, not a review in January when the tax year has already closed.
Not all profit needs to be extracted immediately. Retained profit within a limited company is taxed at Corporation Tax rates — 19% on profits up to £50,000 and 25% above £250,000 — rather than at personal income tax rates. For a technology founder reinvesting profit into product development, hiring, or building a cash reserve before an exit, retaining profit in the company and extracting it in a future year of lower personal income is often more efficient than drawing it all out annually.
The interaction between retained profit, the carried-forward losses that many early-stage technology companies have from pre-profitability years, and the timing of dividend draws makes salary and dividend planning a genuine year-round discipline for technology founders — not a once-a-year decision.
This is one of the most consequential accounting decisions a software or IT company makes — and it affects both the financial statements and the tax position.
Under UK GAAP (FRS 102), development costs can be capitalised as intangible assets where the technical feasibility of completing the software, the intention to complete and use or sell it, and the ability to generate future economic benefits can all be demonstrated. Research costs cannot be capitalised.
The decision to capitalise or expense development costs affects reported profitability, the balance sheet, and the amortisation charge in future years. It also interacts with R&D tax relief claims — because the treatment of development costs in the accounts affects what is available to be claimed as qualifying R&D expenditure.
A technology company that capitalises all development costs and amortises them over several years may find that its R&D claim is more limited in the year of spend than if those costs were expensed immediately. Conversely, a company that expenses all development costs takes a larger profit hit in the current year but may have a more straightforward R&D claim.
There is no universally correct answer — the right treatment depends on the specific costs, the stage of the product, the company's financial reporting objectives, and the interaction with the R&D claim. Getting specialist advice on this decision — rather than defaulting to capitalisation or expensing everything as a blanket policy — makes a material difference to both the financial statements and the tax position.
Hiring in London's technology market is expensive. Developer and engineering salaries are among the highest of any sector, employer National Insurance adds materially to the cost of each hire, and the competition for talent means benefits packages matter.
Several tax-efficient employment structures are worth understanding for a London technology company:
Employee share schemes — the Enterprise Management Incentive (EMI) scheme allows qualifying companies to grant share options to employees up to a total of £3 million outstanding at any one time, with individual grants up to £250,000 per employee over a three-year period, without the options being treated as employment income when granted. EMI options are one of the most powerful tools available to London technology companies for attracting and retaining talent without the full cash cost of equivalent salary increases. The tax treatment on exercise and disposal is significantly more favourable than unapproved options.
Research and development tax credits covering staff costs — qualifying R&D staff costs are the largest single category of qualifying expenditure in most IT and technology R&D claims. Getting the allocation of staff time to qualifying activities right — documented at the project level — maximises the claim and ensures it is defensible under HMRC review.
Electric company cars and salary sacrifice — the benefit-in-kind rates on fully electric company cars are significantly lower than those on petrol and hybrid vehicles. Salary sacrifice arrangements for electric vehicles can be tax-efficient for both the employer and employee. For a London technology company where staff commuting patterns may make a company car scheme impractical, cycle-to-work schemes and home office equipment provisions are alternative employee benefit options worth considering.
Three developments are particularly significant for London technology limited companies in 2026.
The IR35 threshold changes from April 2026 are the most significant development in the contracting market since the private sector off-payroll reforms of 2021. IT contractors whose clients have been reclassified as small need to review their current status determinations and understand who now holds responsibility for each engagement. For technology consultancies that engage contractors through their own company, the reclassification of engager clients further down the supply chain may have knock-on effects that need to be assessed.
The merged R&D scheme is now firmly established as the operating regime for accounting periods beginning on or after 1 April 2024. Technology companies that have not yet reviewed their R&D claims under the new rules — or that were using the old SME scheme and have not assessed whether ERIS or the merged scheme applies to them — need to do that review. The rates and qualifying rules have changed, and claims prepared under the old framework are not simply transferable.
Making Tax Digital for Corporation Tax is in development and will expand digital reporting requirements for limited companies in the coming years. Technology companies — which should, in principle, be well placed to adopt digital bookkeeping — that are still running their accounts on spreadsheets or through a non-integrated system need to address this before it becomes a compliance requirement rather than a choice.
Pulse Accountants works exclusively with limited companies, and technology is one of our strongest sectors. We work with software developers, IT consultancies, managed service providers, SaaS businesses, cybersecurity companies, digital agencies, and technology contractors across London and the rest of the UK — from our London office at 368 Gray's Inn Road, King's Cross, our Newcastle office, and our head office in Newton Aycliffe, County Durham.
Technology tax is not a sideline for us. We understand R&D claims from the ground up — the technical narrative, the staff time allocation, the interaction with the merged scheme and ERIS, and how to make a claim that is both maximised and defensible. We understand IR35 at the level of the three core tests and the 2026 threshold changes. And we understand the structuring decisions that matter for technology founders — from salary and dividend planning around the £100,000 trap to EMI option schemes to exit planning.
Our London office is at 368 Gray's Inn Road, King's Cross, London WC1X 8BB. Our head office is at Parsons Court, Newton Aycliffe, County Durham DL5 6ZE. Our Newcastle office is at 3-7 Broad Chare, Newcastle upon Tyne NE1 3DQ.
Find out more on our Technology page or our London accountants page at pulse-accountants.co.uk.
If you are running a limited company in London's technology sector and want a straight conversation about your R&D claim, your IR35 exposure, your salary and dividend structure, or whether your current accountant is doing everything they should — we would like to hear from you.
The first conversation is free and without any obligation.
Get in touch: help@pulse-accountants.co.uk
What R&D tax credits can a London IT or software company claim in 2026?
For accounting periods beginning on or after 1 April 2024, IT and technology companies claim under the merged R&D scheme, which provides a Research and Development Expenditure Credit at 20% of qualifying expenditure. After Corporation Tax, the net benefit for a profit-making company paying the 25% main rate is approximately 15% of qualifying spend. Loss-making SMEs spending at least 30% of total expenditure on qualifying R&D may qualify for the Enhanced R&D Intensive Support (ERIS) scheme, which provides a higher effective benefit of up to approximately 27%. Qualifying expenditure includes staff costs on qualifying R&D activity, software tools used in qualifying projects, and certain subcontractor costs.
What counts as qualifying R&D for a software company?
Qualifying R&D in software requires a genuine advance in scientific or technological knowledge and the resolution of scientific or technological uncertainty — uncertainty that a competent professional in the field could not readily resolve using existing knowledge. Developing novel algorithms, genuinely new AI or machine learning models, new cybersecurity approaches, or technically novel integration work may qualify. Routine software development, customisation of existing platforms, standard web development, and business analysis do not qualify. HMRC's scrutiny of IT sector R&D claims has intensified significantly — claims need a clear technical narrative and project-level documentation to be defensible.
What did the April 2026 IR35 threshold changes mean for IT contractors?
From 6 April 2026, the thresholds defining a small client for IR35 purposes increased: turnover from £10.2 million to £15 million, and balance sheet total from £5.1 million to £7.5 million (the 50-employee limit was unchanged). A company qualifies as small if it meets at least two of these three criteria. Where a client is small, the IT contractor's PSC — not the client — is responsible for determining IR35 status. The reclassification of approximately 14,000 businesses from medium to small means many IT contractors now hold responsibility for their own status determination for engagements they previously relied on their client to assess. Each active engagement needs a current written assessment.
How should a London technology company founder pay themselves tax-efficiently?
For most technology company founders, a combination of a director's salary and dividends is the most tax-efficient structure. Corporation Tax at 19% (profits up to £50,000) or 25% (above £250,000) applies to company profits before dividends are paid. Dividends above the £500 annual dividend allowance are taxed at 10.75% (basic rate), 35.75% (higher rate) or 39.35% (additional rate) personally. A key consideration for founders approaching higher income levels is the effective 60% marginal rate trap between £100,000 and £125,140, where the personal allowance is withdrawn. Planning annual drawings to manage this band makes a material difference to the overall tax position.
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