Katy Proctor
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Contracting through your own limited company in London puts you in one of the most rewarding working arrangements in the UK, and one of the most closely watched by HMRC. Day rates in the capital are strong and demand across tech, finance and professional services keeps growing. The structure gives you flexibility and tax efficiency no other setup can match, but the rules have become more complex and the cost of getting them wrong has grown with them.
Here is what every London limited company contractor should have a handle on, in plain English.
A limited company lets you pay yourself through a mix of salary and dividends, claim a wider range of business expenses, and present a professional structure that clients, agencies and mortgage lenders take seriously. No other setup offers all three.
The trade off is more compliance. Annual accounts at Companies House, Corporation Tax returns, VAT returns once registered, payroll for your director's salary and Self Assessment for you personally. None of it is difficult with the right support, but none of it is optional either. This is where a specialist contractor accountant genuinely pays for itself.
Most contractors are best served by a modest director's salary combined with dividends. Salary attracts income tax and National Insurance but reduces your Corporation Tax bill. Dividends come from post tax profit but are taxed at lower personal rates for most income levels.
The typical approach is a salary set around the relevant National Insurance threshold, with the remainder drawn as dividends. This keeps a salary on record for pension contributions, mortgage applications and state benefit entitlements while capturing the tax efficiency of dividends.
The optimal split shifts as thresholds and allowances change, and it depends on your wider income, your spouse's income and your personal tax band. Review it with your accountant every spring rather than setting it once and forgetting about it.
IR35 decides whether HMRC treats you as genuinely self employed through your company or as a disguised employee of your client. For most private sector engagements, responsibility for that decision now sits with your end client, and the consequences of getting it wrong are significant.
Inside IR35 means you are taxed like an employee for that contract, with tax and National Insurance deducted before your day rate reaches your company. Most of the tax advantage of a limited company disappears for that engagement.
Outside IR35 means you operate as a genuine contractor, paying yourself through salary and dividends and claiming business expenses as normal.
The London market is mixed. Banking and financial services tend to be cautious and place many contracts inside. Tech, digital and creative agencies engage outside more readily, especially for genuinely project based work. Public sector roles are almost always inside. Whatever the determination, the contract terms and the real working arrangement must match. The biggest risks come from contracts written as outside but worked as inside.
If you have any doubt, get the contract reviewed before you sign. Defending an HMRC enquiry costs far more than getting the status right at the start.
Contractors can typically claim travel and subsistence to temporary workplaces, use of home as office, business mobile and broadband, professional subscriptions and training, accountancy fees, business insurance, software subscriptions and pension contributions made by the company. Every legitimate expense reduces your Corporation Tax bill.
One of the most common patterns we see with new clients is contractors who have been operating for years and claiming far less than they should.
Pension contributions deserve special mention. Employer contributions paid directly from your company into your personal pension attract Corporation Tax relief without triggering personal income tax. For higher earning contractors this is often the single best tax planning move available.
You must register for VAT once your turnover crosses the registration threshold, and most London contractors reach it quickly, so VAT becomes part of life early on.
The Flat Rate Scheme was once a quiet money maker for contractors, but reforms introduced the limited cost trader category and reduced the benefit for most. Standard VAT accounting is now the right answer for the majority, though it is worth confirming with your accountant rather than assuming.
The bigger point is mindset. VAT is your client's money passing through your hands, not yours. Late returns, late payments and mistakes on expense treatment are among the easiest ways to trigger an HMRC enquiry.
Making Tax Digital is HMRC's move towards fully digital, more frequent reporting. Digital VAT records are already mandatory, and quarterly digital reporting is being phased in for self employed income, though limited company directors are not caught in the same way sole traders are.
The direction of travel is clear. HMRC wants real time visibility of business performance, and contractors still running on spreadsheets will find life harder as the rules tighten. Moving onto cloud software like Xero or QuickBooks with proper monthly bookkeeping removes that pressure and gives you a clearer picture of your own finances.
We work exclusively with limited companies, so our entire service is built around the realities of running a contracting company. We handle annual accounts, Corporation Tax, monthly payroll, VAT returns and the strategic tax planning that separates contractors who keep most of what they earn from those who hand it back to HMRC.
Our London team supports contractors across tech, finance, consulting and professional services, fully remote through Xero and QuickBooks or face to face from our London office.
Speak to a contractor specialist at Pulse. Whether you want to review your salary and dividend split, get a contract checked for IR35 or get a fresh pair of eyes on your tax position, the first conversation is free, friendly and entirely without obligation.
Do contractors in London need a specialist accountant?
A specialist contractor accountant understands IR35, salary and dividend planning and the compliance cycle of a personal service company, which a generalist often does not. For most contractors the tax savings comfortably outweigh the fee.
Can I still work through a limited company if my contract is inside IR35?
Yes. Many contractors keep their company running for outside IR35 work while inside contracts are taxed at source. Your accountant can advise whether keeping the company open makes sense for your mix of work.
How often should I review my salary and dividend split?
At least once a year, ideally at the start of each new tax year, and whenever your income or circumstances change significantly.
Is the Flat Rate Scheme still worth it for contractors?
For most contractors standard VAT accounting is now the better option, but the right answer depends on your cost profile, so check with your accountant before deciding.
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