Tax Planning Under IR35. Smart Strategies for Contractors

Getting caught by IR35 rules doesn't just mean you're inside the rules, it means you're paying significantly more tax. But even if HMRC decides you're an employee for tax purposes, there are legitimate ways to reduce your bill and keep more of what you earn. Whether you're dealing with off-payroll working rules in the private sector or public sector IR35, understanding your options is crucial. Tax planning isn't tax avoidance. It's about understanding exactly what you can and can't do within the rules, and making smart decisions accordingly.

Understanding Your IR35 Status Determination

Before diving into tax planning, you need certainty about your IR35 status. The Status Determination Statement (SDS) from your client outlines whether they consider you inside or outside IR35. This determination affects everything from how you invoice to what expenses you can claim.

Private sector contractors work under the off-payroll rules where the client determines status. Public sector contractors have faced these rules since 2017. In both cases, getting your IR35 assessment right is the foundation of effective tax planning.

Tax Planning Strategies When You're Inside IR35

When a contract falls inside IR35, you can't take dividends from your limited company's profits. Instead, you'll pay salary through PAYE, which means Income Tax and National Insurance on everything above your personal allowance.

For a contractor earning £60,000 through their limited company, the difference is brutal. Outside IR35, you might pay around £12,000 in total tax. Inside IR35? That jumps to roughly £16,000. That's four grand less in your pocket for doing exactly the same work.

The 5% expense allowance you're entitled to barely softens the blow.

Your Company Running Costs Still Count

Here's something contractors often miss: just because you're inside IR35 for one contract doesn't mean your company expenses disappear.

Your accountancy fees, professional indemnity insurance, business banking charges—these are all legitimate company expenses. They come off your profit before you calculate what needs to go through payroll.

Same goes for your office costs if you're working from home. You can claim a portion of your utilities, internet, even mortgage interest if you use a room exclusively for business. HMRC has flat rates for this, but actual cost claims usually work out better if you've got the records to back them up.

Computer equipment, software subscriptions, professional development—all claimable. The key is they must be wholly and exclusively for business purposes.

Pension Contributions Are Your Friend

Employer pension contributions are one of the most tax-efficient moves available when you're inside IR35. They reduce your company's Corporation Tax bill and don't trigger Income Tax or National Insurance.

You can contribute up to £60,000 per year into your pension (including the 25% tax relief the government adds). For higher earners, this annual allowance tapers down, but even the reduced amount offers substantial tax savings.

Let's say you're inside IR35 and taking £50,000 as salary. If your company contributes £10,000 to your pension instead of paying it as salary, you save roughly £4,200 in Income Tax and National Insurance. Your pension pot grows by the full £10,000.

The catch? You can't touch it until you're 55 (rising to 57 in 2028). But if you're building long-term wealth, pensions beat almost every other option.

Structure Multiple Contracts Carefully

Got more than one client? Each contract needs its own IR35 determination and working practices assessment. One contract being inside doesn't automatically drag the others in with it.

If you've got a mix—some inside, some outside—you need separate accounting for each. Keep meticulous records. Your inside IR35 income goes through payroll. Your outside contracts still allow dividend payments.

It's more admin, but it's also perfectly legal and can make a real difference to your annual tax bill.

The Timing Game

When you invoice matters more than you'd think. If you're moving from outside to inside IR35 (or vice versa), the timing of your invoices can shift thousands in tax liability between years.

Invoice before the status change and get paid after? The treatment follows when the work was done, not when you got paid. Your accountant should be all over this, but it's your money—stay involved.

Similarly, if you're expecting a particularly good year followed by a quieter one, bringing forward expenses or delaying income can smooth your tax liability and keep you in a lower band.

IR35 Travel Expenses: Understanding the Rules

This is where contractors get themselves in trouble. The rules around travel and subsistence under IR35 are strict and frequently misunderstood.

If you're working at the client's site under supervision, direction and control—the hallmarks of being inside IR35—then your travel to that site is ordinary commuting. Not claimable.

However, if your contract is genuinely project-based, temporary, and you're working at multiple locations, there's an argument for those costs being business travel. The 24-month rule applies: if you're at the same location for less than 24 months, you might be able to claim.

It's a fact-specific assessment. Get it wrong and you're looking at penalties.

Use Your Spouse (Legitimately)

If your spouse or partner genuinely works in your business, paying them a salary is a legitimate tax planning tool. They get their own personal allowance and lower rate tax bands.

The work must be real, though. HMRC aren't stupid. "Administrative support" for 20 hours a week needs to be evidenced with actual tasks, emails, records of work done.

But if they're genuinely handling your invoicing, bookkeeping, client communications, and business admin? A salary of £12,570 (the personal allowance for 2024/25) costs your company nothing in effective tax and gives them an income they're not taxed on.

Keep Challenging Status Determinations

Just because a client says you're inside IR35 doesn't make it gospel. Many contractors find themselves wrongly classified as deemed employees when their actual working arrangements suggest otherwise. Many companies blanket-apply inside determinations because it's easier than doing proper assessments.

If you genuinely believe your working practices put you outside, challenge it. You'll need evidence: your contract, how you actually work, who controls what you do, whether you can send a substitute.

The Status Determination Statement (SDS) process gives you the right to disagree. Use it. The worst they can say is no, but you might find they haven't properly considered your circumstances.

Work With a Specialist

IR35 sits at the intersection of employment law, tax law, and contract law. Getting it right needs someone who lives and breathes this stuff.

A specialist contractor accountant costs more than a high street generalist, but they'll save you multiples of their fee in legitimate tax planning and, crucially, keeping you the right side of HMRC.

They'll also represent you if HMRC come knocking, which for many contractors is worth the fee on its own.

Staying Compliant With IR35 Legislation

IR35 compliance isn't optional, but neither is leaving money on the table. The IR35 tax rules are complex, but with proper planning, contractors can navigate them effectively while staying completely within the law.

The key is understanding that being inside IR35 doesn't mean accepting every penny of tax liability without question. It means knowing exactly what you can legitimately claim, plan, and structure.

The Bottom Line

Being inside IR35 costs you money. There's no getting around that. But the difference between paying 27% of your income in tax and paying 35% often comes down to proper planning and knowing exactly where the boundaries are.

None of this is about bending rules or taking risks with HMRC. It's about using every legitimate allowance, relief, and structure available to you. That's not just sensible—it's what anyone in business should be doing.