Possible Structures & Their Key Tax Implications
| Structure | Income Tax & NIC | Corporation Tax & Dividends | IR35 Relevance |
|---|---|---|---|
| Sole Trader / Partnership | Pay Income Tax on profits; Class 2 and 4 NICs; no corporation tax | N/A | IR35 does not apply—it’s direct employment/self-employment relationship |
| Limited Company (non-PSC-controlled) | Salary taxed via PAYE; dividends taxed at dividend rates; personal allowances available | Corporation Tax at current rate (25%) on company profits; tax on dividends when drawn | IR35 only concerns PSCs or contractors where personal services legislation triggers “off-payroll” rules |
| Personal Service Company (PSC) | Same as limited company—but if IR35 applies, income treated as employment: higher PAYE/NIC, fewer reliefs | Closer scrutiny; IR35 status due to 2021 reforms remains important for clients | Must decide status tests; CEST tool; contracts; |
Why IR35 Still Matters in 2026
- Contractors working via PSCs must determine inside or outside IR35 for each engagement. If inside, client (or fee-payer) deducts PAYE/NIC. Background hasn’t changed since the reform in April 2021—guidance was last materially updated February 2026. (gov.uk)
- Getting it wrong risks unexpected tax liabilities, interest and penalties. Clear contracts, actual working practices, and documentation crucial.
Case Study: Freelance Consultant with Mixed Client Base
- Scenario: Alice provides consulting via her limited company, works for both small businesses and large organisations.
- Tax planning: For clients where IR35 might apply, demonstrate that she is genuinely independent: decide hours, provide substitutes, hold financial risk.
- Entity setup considered: if she spent more than half of income governed by IR35, perhaps shift more business to clients who are small enough (IR35 exemption) or adopt split-payment models.
Other Factors to Consider
- Administrative load: running a company means bookkeeping, payroll, corporation tax, and filing accounts. A sole trader has simpler compliance but fewer tax planning tools.
- Liability: limited company protects personal assets; sole trader does not.
- Funding & pensions: companies can retain profits, make employer pension contributions; individuals might be more constrained.
Action-Oriented Advice
- Map your client types: large clients trigger IR35 obligations; small clients less so.
- Review contracts regularly for clauses around control, substitution, mutuality of obligation—key for IR35 status.
- Forecast income under both salary plus dividends vs profits reinvested; assess Corporation vs Income Tax exposure.
- Ensure compliance: register properly, adopt Making Tax Digital where required, keep accurate records.
- Seek professional advice if in grey areas—IR35, cross-border income, or complex entity structures.
Advisory Research Highlights
- PwC analysis emphasises that PSCs must carefully manage risk around IR35 for clients in medium/large businesses.
- Deloitte’s publications caution that changes to non-dom taxation mean PSC owners with overseas income or gains need to reframe how they manage foreign assets and trust income.
By choosing wisely between a sole trader, limited company, or PSC—and aligning practices with IR35 rules—contractors can manage 2026 tax liabilities, protect themselves legally, and optimise take-home income.