Accounting software for contractors that does the work for you.

What does a contractor's accounting actually involve?

Most UK contractors trade through their own limited company, often called a personal service company. That structure is what makes contracting tax-efficient, but it also makes you a company director with a director's legal duties. Your company is a separate legal person from you, so it keeps its own books, reports its own profit, and files its own returns. The day rate lands in the company, and how you get it out, salary, dividends or both, determines your tax. None of that happens by itself.

In practice, a contractor's accounting splits into a handful of recurring jobs. You invoice your agency or end client, usually monthly, and chase payment. You record income and expenses so the books stay current. You submit a VAT return every quarter if you are registered. You decide each month or quarter how much salary and dividend to take. And once a year you file annual accounts at Companies House and a Corporation Tax return with HMRC. Layered over all of it is the question that defines contracting: which side of IR35 each engagement falls.

The thing that makes contractor accounting genuinely different from a normal small company is the cadence and the uncertainty. Contracts start and end. A client puts you outside IR35; the next one puts you inside. You might run two agencies and a direct client at once, each paying on different terms. Income is lumpy, expenses are spread across travel and equipment, and the rules you have to apply, off-payroll working, the deemed payment calculation, the Flat Rate Scheme, change depending on circumstances. That is a lot to hold in your head when your actual job is delivering for the client who is paying the day rate.

This is exactly the work AccountsOS takes off your plate. Because most contractors run a limited company, the foundations are the same as any company, so it is worth reading our broader guide to accounting for limited companies alongside this page. The bookkeeping happens as money moves, the deadlines pull in automatically, and the filings are drafted for you to review, so the second job disappears.

How does IR35 affect a contractor's accounting?

IR35, also known as the off-payroll working rules, exists to stop people working like employees but being paid like companies to save tax. The rules ask a simple question of each contract: if you stripped away the limited company, would this look like employment? If yes, the contract is inside IR35 and most of the income must be taxed as employment income. If no, it is outside IR35 and you can run it through your company the tax-efficient way. The tests that decide it are control, the right to send a substitute, and mutuality of obligation.

Since April 2021, who decides your IR35 status depends on the end client. In the public sector, and in the private sector when the end client is a medium or large business, the client makes the determination and the fee-payer, often the agency, deducts tax at source before the money reaches your company. When the end client is a small business, the responsibility stays with you, the contractor, to assess each contract and account for it correctly. Knowing who holds the determination matters because it changes how cash arrives and what your company can do with it.

The accounting consequences are real. For an outside-IR35 contract, the day rate lands in the company as turnover, you pay yourself a low salary and the rest as dividends, and the company pays Corporation Tax on its profit. For an inside-IR35 contract where the fee-payer has already deducted tax, that income arrives net and is treated as a deemed employment payment, so you should not draw it again as a dividend. Where you assess a contract as inside IR35 yourself, the company must calculate a deemed payment, run it through PAYE, and pay income tax and National Insurance on it. Mixing the two up, taking a dividend out of money that was already taxed as employment, is a classic and costly error.

AccountsOS keeps the two streams cleanly separated in your books, so an inside-IR35 engagement never gets quietly redrawn as a dividend. Finn flags when income looks like a deemed payment that has already been taxed, and you can sanity-check any contract's likely status with our IR35 checker before you sign. The software does not give you a formal status determination, that is the client's job in many cases, but it makes sure your books reflect reality whichever way each contract falls.

Inside IR35 versus outside IR35: what is the take-home difference?

The reason IR35 matters so much to contractors is money. The same gross income leaves very different amounts in your pocket depending on which side of the line a contract sits, because outside IR35 you take dividends taxed at 8.75 percent rather than salary taxed at higher rates with National Insurance on top. Take a contractor on a £500 day rate working roughly 220 billable days a year, giving annual income of around £110,000 before VAT. The table below shows the broad shape of the difference for 2026/27. These are illustrative figures to show the gap, not a personal tax computation.

The headline is that an outside-IR35 contract on the same gross income typically leaves you several thousand pounds a year better off, sometimes £10,000 or more at this rate, because of the dividend treatment and the National Insurance saving. That is precisely why getting the status right, and accounting for it correctly, is worth real attention. It is also why an inside-IR35 determination on a contract you expected to be outside can blow a hole in your budgeting if you have already drawn dividends against it.

Many contractors now run a mix: an outside-IR35 client and an inside-IR35 engagement in the same tax year. That is perfectly legitimate, but it makes the bookkeeping fiddly, because the two streams must be kept apart and taxed differently inside the same company. AccountsOS handles a mixed year without you having to maintain two mental ledgers, tagging income by engagement and keeping the deemed-payment money ring-fenced from your distributable profit.

Should a contractor use an umbrella company or a limited company?

This is the first decision most new contractors face, and it sets the shape of all your accounting afterwards. An umbrella company employs you. It receives your contract income, runs it through PAYE, deducts income tax and National Insurance, and pays you a net salary. There is no company to run, no Corporation Tax, no Companies House filing, and no dividends. It is the simplest possible setup, and for short stints or wholly inside-IR35 work it is often the sensible choice.

A limited company, your own personal service company, is more work but far more tax-efficient for ongoing outside-IR35 contracting. You invoice clients, the money lands in the company, you take a low salary plus dividends, and you claim a wider range of expenses. The cost is the admin: annual accounts, a Corporation Tax return, a confirmation statement, VAT returns if registered, and payroll for your own salary. Historically that admin is what pushed contractors towards umbrellas or expensive accountants. Software that does the admin for you changes that calculation entirely.

The honest rule of thumb is that if your contracts are mostly outside IR35 and you expect to keep contracting, a limited company puts thousands more a year in your pocket, and the only thing that ever made an umbrella tempting was avoiding the paperwork. With AccountsOS doing the bookkeeping, VAT, dividend planning and year-end accounts for £20 a month, the paperwork stops being a reason to give up that take-home. If your work is short-term or wholly inside IR35, an umbrella may still suit you better, and there is no shame in keeping it simple.

What is the best salary and dividend split for a contractor?

For an outside-IR35 contractor running a limited company, the most efficient way to draw money is usually a modest salary up to the personal allowance, then dividends on top. The salary is a deductible expense that reduces the company's Corporation Tax, and it counts toward a qualifying year for your state pension. Dividends are paid from post-tax profit but taxed at lower rates than salary, so the blend beats taking everything as a salary.

The 2026/27 numbers matter here. The tax-free dividend allowance is just £500, down from £2,000 a few years ago. Above that allowance, dividends are taxed at 8.75 percent in the basic-rate band, 33.75 percent in the higher-rate band, and 39.35 percent in the additional-rate band. The personal allowance remains £12,570 and the higher-rate threshold is £50,270. As a worked example, a £500-a-day contractor with around £110,000 of company turnover, after expenses and Corporation Tax, has ample profit to draw. A common split looks like this.

A contractor on a healthy day rate often earns more than the £50,270 the basic-rate band covers, which creates a planning decision: draw the extra as dividends at 33.75 percent, leave the surplus in the company for a leaner year, or make an employer pension contribution, which is deductible for the company and not taxed as your income. This is where contractors leave the most money on the table, because the right answer depends on your whole year, your other income, and whether you expect a gap between contracts.

Finn models the split against your actual profit and tells you, in plain English, what is most efficient and whether the company has the distributable reserves to pay a dividend at all, because dividends drawn from profit that is not there are unlawful and can be reclassified as salary or a director's loan. You can run scenarios yourself with our salary and dividend calculator. No more guessing whether that dividend was safe to take.

What expenses can a contractor claim?

Every pound of allowable expense reduces your company's taxable profit and therefore your Corporation Tax, so a claimed expense is worth 19 to 25 percent of its value back to you. The test is the same as for any company: the cost must be incurred wholly and exclusively for the business. Contractors have a fairly generous range of claimable costs, but the rules tighten when a contract is inside IR35, particularly around travel, so it pays to capture everything and let the software decide what qualifies.

Common allowable contractor expenses include travel and mileage to a temporary workplace, accommodation and subsistence when working away, equipment such as laptops, monitors and phones, software and cloud subscriptions, professional indemnity and public liability insurance, accountancy and software fees, training that maintains or updates your existing professional skills, a proportion of home-office costs when you work from home, mobile and broadband used for business, and employer pension contributions, which are especially tax-efficient. One important contractor-specific point is the travel rule: travel to a workplace you attend under an inside-IR35 engagement is often treated as ordinary commuting and disallowed, whereas travel under an outside-IR35 contract to a temporary workplace is usually claimable. The distinction trips people up constantly.

This is where AccountsOS earns its keep day to day. Forward a receipt by email, snap it on your phone at the client site, or connect your bank, and the AI extracts the supplier, amount and date, categorises it correctly, and matches it to the bank transaction. If a cost looks like personal commuting rather than allowable business travel, Finn flags it before it lands in your accounts. Ask Finn "how much have I spent on equipment this year?" or "is my train fare to the client claimable?" and you get an instant answer, so you stop losing relief because a receipt faded in your jacket pocket.

Do contractors have to register for VAT, and what is the Flat Rate Scheme?

Your company must register for VAT once its taxable turnover passes £90,000 in any rolling 12-month period. On a £500 day rate, most full-time contractors cross that threshold comfortably, so VAT registration is the norm rather than the exception. Once registered you charge 20 percent VAT on your invoices, which your business clients reclaim anyway, and you submit a VAT return every quarter through Making Tax Digital software. You cannot type figures into the HMRC website any more; digital records and compatible software are mandatory.

Many contractors use the VAT Flat Rate Scheme, which simplifies VAT by letting you pay HMRC a fixed percentage of your gross turnover rather than tracking input VAT on every purchase. The headline rate for most professional and IT contractors is 14.5 percent, with a one percent discount in your first year of registration. The catch is the limited-cost trader rule: if you spend very little on goods, which describes most service contractors, you are pushed to a 16.5 percent rate that removes nearly all the benefit. Whether the Flat Rate Scheme still pays off depends on your specific costs, and for many contractors standard VAT accounting is now better.

AccountsOS calculates your nine-box VAT return straight from your bookkeeping, supports both standard and flat-rate schemes, applies the limited-cost trader test, and submits the return to HMRC under MTD. Finn can tell you whether the Flat Rate Scheme or standard accounting leaves you better off given your actual spending, rather than leaving you on a scheme that quietly costs you money. For the full picture of how digital VAT works, see our guide to Making Tax Digital.

How do you handle multiple agencies, clients and invoicing?

Contractors rarely have a single neat income stream. You might bill one agency monthly on a purchase-order number, invoice a direct client on different terms, and pick up a short outside-IR35 engagement on the side. Each has its own rate, its own payment terms, and potentially its own IR35 status. Keeping invoices, payments and the matching VAT straight across several payers is one of the quiet time-sinks of contracting, and chasing late payment from an agency is another.

AccountsOS lets you raise and send invoices to each client or agency, track which are paid and which are overdue, and reconcile incoming payments against them automatically as the money hits your bank. Income is tagged by client and by engagement, so a mixed IR35 year stays organised rather than blurred. When a payment arrives, the AI matches it to the right invoice without you hunting through statements, and you can ask Finn "which invoices are still unpaid?" and get the list instantly. The chasing and the reconciling stop being a Sunday-evening job.

Why does year-end feel so stressful, and how do you fix it?

Year-end is stressful for contractors for the same reason it is for any director: the books were never kept properly during the year, so everything happens at once at the end of it. The classic pattern is a folder of agency remittances, bank statements and a few crumpled receipts handed to an accountant in the ninth month, who then reconstructs twelve months of activity, asks you questions you cannot remember the answers to, and presents a Corporation Tax bill you have not budgeted for. The dread is not really about the accounts. It is about the surprise.

The fix is to keep the books live, so year-end is a review rather than a reconstruction. When every invoice and expense is recorded as it happens, every receipt is captured at the point of spend, and your Corporation Tax estimate updates every time money moves, the year-end accounts are simply a snapshot of a ledger that has been correct all along. There is nothing to dig up because nothing was left undone, and you know your tax bill months ahead, so the cash is set aside and the payment is a non-event rather than a shock.

That is the model AccountsOS is built around. Finn prepares your FRS 105 micro-entity statutory accounts from the running ledger, flags anything that does not reconcile before it becomes a problem, and walks you through the Companies House and HMRC submissions when they are due. Your Companies House filing dates sync automatically every day and appear on your deadline board, with reminders well ahead of time so a filing never sneaks up on you mid-project. You review the figures and file with confidence. The dread goes away because the surprise goes away. For the detail on Corporation Tax, the confirmation statement and the first-year period split, see our limited company tax guide.

Do contractors still need a traditional accountant?

The contractor accountant has been a fixture of the industry for years, typically charging £100 to £200 a month to handle your VAT, payroll, dividends, annual accounts and Corporation Tax return. For that money you usually get a once-a-year conversation, a portal you log into to upload statements, and a three-day wait whenever you have a question. The recurring work, the bookkeeping, the VAT returns, the deadline tracking, is exactly the kind of work software now does faster and without the wait.

It is fair to ask whether software can really replace a qualified accountant, and the honest answer is that for most contractors it can do the recurring work that fills the bulk of an accountant's time. AccountsOS keeps the double-entry ledger, runs the VAT, models the salary and dividend split, tracks Corporation Tax, separates inside and outside IR35 income, and drafts your statutory accounts for you to file. What software does not replace is bespoke advice on a genuinely unusual situation, a contested IR35 enquiry from HMRC, an IR35 status you want a formal opinion on, or winding the company down. For those, you bring in a specialist, and because your books are already clean and current, that advice is cheaper and faster.

The right mental model is that AccountsOS keeps your books impeccable all year for £20 a month, a fraction of a contractor accountant, and answers your questions the moment you ask rather than three days later. If you ever do need a human for a one-off, you walk in with current numbers rather than a folder of remittances. Learn more about how AccountsOS fits the way contractors actually work on our accounting for contractors solution page.

How AccountsOS handles your contractor accounting

AccountsOS is an AI-native accounting platform built around Finn, your AI accountant. Finn does not just store your numbers, it actively does the work a contractor accountant would, instantly and in plain English. Here is how each contractor pain maps to what the software does for you.

The difference from a traditional contractor accountant is speed and access. Your books are live, not reconstructed once a year from a folder of remittances. Your questions are answered in seconds, not in three working days. And your filings are drafted for you to check, not held hostage until you have paid the invoice. If you are currently paying £100 to £200 a month for an accountant you rarely speak to, AccountsOS does the recurring work for £20 a month and is there the moment you have a question between client calls.

And if you are migrating from another tool or a previous accountant's software, the AI maps your existing chart of accounts across automatically and re-categorises your transactions, so switching is a job for an afternoon, not a fortnight. You keep filing on time without missing a beat.

Getting set up takes about ten minutes