IR35 Bookkeeping for UK Contractors — What You Need to Know in 2026

What IR35 actually is

IR35 is HMRC's off-payroll working legislation. It targets contractors who work through their own limited company but operate in a way that is functionally equivalent to employment. If HMRC determines that your working arrangement would be employment without the limited company in between, IR35 applies — and you pay tax as an employee.

The rules changed significantly in April 2021 for medium and large companies in the private sector. The engager (your client, not you) is now responsible for determining IR35 status. For small companies and public sector engagers, the rules have been in place for longer.

Inside vs outside IR35 — the financial difference

Outside IR35: You work through your limited company, pay yourself a mix of salary and dividends, claim allowable business expenses, and pay Corporation Tax on company profits. This is typically the most tax-efficient arrangement.

Inside IR35: Your client or agency deducts income tax and National Insurance at source before paying you — effectively treating you as an employee. Your limited company receives the net amount. You still have a company with administrative obligations, but you get fewer of the tax benefits.

The difference in take-home pay between inside and outside IR35 can be significant — often several hundred pounds per month on a typical contractor rate.

How your bookkeeping changes under IR35

The bookkeeping obligations for a limited company do not change under IR35 — you still need full company accounts, bank reconciliation, VAT returns (if applicable), payroll records, and Corporation Tax computation. What changes is the income and how it is structured.

Inside IR35: The company receives net payments after deduction of deemed employment tax. This requires careful reconciliation to ensure the amounts received match the expected net-of-tax figures on the contract.

Outside IR35: Normal limited company bookkeeping applies. Track all income, expenses, payroll, and dividends. A good bookkeeper will ensure your salary/dividend mix is optimised for the current year's rates.

Records you must keep as a UK contractor

HMRC can investigate IR35 status and look at the substance of your working arrangements, not just the contractual terms. You should retain:

• Signed contracts for every engagement, with clear IR35 determination
• Evidence of working practices (ability to substitute, multiple clients, lack of control)
• Invoices issued and payments received
• Expense receipts and business accounts
• Payroll records if you employ yourself through the company

Keep these records for at least 6 years after the end of the relevant tax year.

The Making Tax Digital impact on contractors

If your limited company is VAT-registered, all VAT records and returns must be submitted through MTD-compatible software from April 2022. This is already in place. MTD for Corporation Tax is on the government's roadmap but has not been mandated yet — watch for updates.

If you operate as a sole trader contractor (outside a limited company structure), MTD for Income Tax applies to you from 6 April 2026 if your income exceeds £50,000 — and from April 2027 if it exceeds £30,000.

Should you use a specialist contractor accountant or bookkeeper?

Many UK contractors use specialist firms that focus entirely on IR35 compliance and limited company accounting. The advantage is deep expertise in contractor-specific tax planning. The disadvantage is often higher fees and less personal service.

A general bookkeeper who is Xero-certified and has experience with limited companies and IR35 can handle all of this effectively at a lower cost — as long as they are comfortable with IR35 status assessments and dividend/salary mix planning.

The key question to ask any bookkeeper: are you familiar with IR35 inside/outside distinction and can you confirm you have worked with contractor limited companies before?