Two different questions
A contractor using a personal company normally faces two separate tax questions. First, how should the individual’s work be classified for employment-tax purposes under the off-payroll working rules, commonly known as IR35? Second, how should money extracted from the company be taxed as salary, dividend or another distribution?
These questions interact economically but are not interchangeable. A dividend cannot turn an employment relationship into genuine self-employment, and a company structure does not by itself decide whether the off-payroll working rules apply.
Distribution reforms announced in Budget 2026
The government has announced reforms to modernise the framework for distributions from companies to individual shareholders. The official factsheet says the reforms are intended to tax similar transactions consistently, regardless of the legal form used or where the company is based. The changes are planned to take effect from April 2028, with draft legislation for technical consultation expected in 2027.
This means company owners should be cautious about making long-term extraction decisions based only on today’s comparison between salary, dividends and capital treatment. The proposed framework is aimed particularly at arrangements that use transactions such as share buybacks or other distributions to obtain a different tax result.
IR35 documentation still matters
For each engagement, contractors should preserve evidence about the actual working relationship, including:
- The written contract and statements of work;
- Who controls when, where and how the work is performed;
- Whether the contractor can provide a substitute;
- The degree of mutual obligation;
- Responsibility for correcting defective work;
- Commercial risk and financial responsibility; and
- Whether the contractor is integrated into the client’s organisation.
The contract should match operational reality. A label such as “consultant” or “independent contractor” is not enough if the day-to-day relationship looks like employment.
Example
A software consultant may operate through a company and receive dividends. If the client sets fixed working hours, requires personal service, directs the consultant’s daily tasks and provides most equipment, those facts may indicate employment-like characteristics. Separately, the company’s extraction strategy must account for the distribution rules in force at the time and any later reforms.
Recommended actions
- Review each engagement independently rather than applying one IR35 conclusion to every client.
- Ask the client or public-sector body for the formal status determination where required.
- Keep contemporaneous evidence, not just documents prepared after an HMRC enquiry begins.
- Model cash extraction under current law and stress-test the plan against the proposed April 2028 reforms.
- Obtain advice before using share buybacks, liquidations or other capital-style extraction routes.
Bottom line
Incorporation can provide commercial and administrative benefits, but it does not eliminate employment-status analysis or future distribution-tax risk. Contractors should maintain robust IR35 evidence and treat Budget 2026’s distribution reforms as a reason to review long-term planning, not as an immediate change to every existing dividend.