Most consultants pay more income tax than they need to. Not because they are doing anything wrong, but because nobody has ever sat down with them and explained how the system actually works in their favour.
Whether you are a sole trader consultant or operating through a limited company, the decisions you make about how your business is structured and how you manage your finances have a direct impact on how much of your income you actually keep.
At APH, we have been helping consultants across the UK get their income tax right since 2010. This guide covers the essentials in plain English.
First things first: how are consultants taxed?
The answer depends on your business structure.
As a sole trader consultant, you pay income tax and National Insurance on your business profits through self-assessment. Your profits are your income minus your allowable business expenses.
As a limited company consultant, the picture is more complex but potentially more tax efficient. Your company pays corporation tax on its profits. You then pay yourself a combination of salary and dividends, each taxed differently at the personal level.
The structure you choose has more impact on your overall tax position than almost any other decision you will make as a consultant.
If you are unsure which structure is right for your situation, our limited company accountancy services page covers the key considerations in more detail.
Income tax for sole trader consultants
As a sole trader, you pay income tax on your profits. The following rates apply for the 2025/26 tax year. Note that the personal allowance is not technically a tax band but the amount you can earn before income tax applies:
- Personal Allowance: up to £12,570, no income tax payable
- Basic rate: £12,571 to £50,270, taxed at 20%
- Higher rate: £50,271 to £125,140, taxed at 40%
- Additional rate: above £125,140, taxed at 45%
On top of income tax, you also pay Class 4 National Insurance contributions for 2025/26:
- 6% on profits between £12,570 and £50,270
- 2% on profits above £50,270
The combined effect of income tax and National Insurance means that a sole trader consultant earning above the higher rate threshold is paying a significant proportion of their profits to HMRC.
This is one of the main reasons consultants at higher income levels often find a limited company structure more tax efficient.
Income tax for limited company consultants
If you operate through a limited company, your income tax position works differently.
Your company pays corporation tax on its profits. For the 2025/26 tax year the small profits rate is 19% on profits up to £50,000. The main rate is 25% on profits above £250,000. Between these two thresholds, marginal relief applies, meaning the effective rate tapers gradually between 19% and 25% depending on your profit level.
You then pay yourself personally, typically through a combination of:
- A low salary set at or around the personal allowance threshold of £12,570
- Dividends from the company’s after-tax profits
Dividend tax rates for 2025/26:
- Up to £500 dividend allowance: 0%
- Basic rate: 8.75%
- Higher rate: 33.75%
- Additional rate: 39.35%
The combination of a low salary and dividends means most limited company consultants pay considerably less in personal tax than an equivalent sole trader at the same income level.
The saving varies depending on your income level and how much you extract from the business, but for many consultants it runs to several thousand pounds per year.
Allowable expenses: the same rules apply to both
Whether you are a sole trader or a limited company consultant, claiming the right expenses is one of the most effective ways to reduce your taxable profit.
Allowable expenses must be wholly and exclusively for business purposes. Common examples for consultants include:
- Home office costs
- Travel to client sites
- Professional indemnity insurance
- Software subscriptions
- Training and CPD
- Professional memberships
- Accountancy fees
Every legitimate expense you miss is profit that gets taxed unnecessarily.
We have covered consultant expenses in detail in our guide to consultant tax deductions.
Self-assessment: what sole traders need to know
As a sole trader consultant, you report your income and expenses through an annual self-assessment tax return.
Key deadlines to keep in your diary:
- 5th October: deadline to register for self-assessment if newly self-employed
- 31st January: online tax return submission deadline and payment of tax owed
- 31st July: second payment on account deadline if applicable
Missing the filing deadline for your self-assessment return can result in an automatic late filing penalty. The rules around penalties and whether they apply in all circumstances are worth checking with your accountant.
Payments on account are one of the most common surprises for new consultants. If your tax bill exceeds £1,000, HMRC requires two advance payments toward the following year’s bill, due on 31st January and 31st July. Planning for these from the start avoids a very unwelcome cash flow shock.
Corporation tax and self-assessment for limited company consultants
If you operate through a limited company, you have two separate tax obligations.
Your company must file a corporation tax return and pay any corporation tax due within nine months and one day of the company’s accounting year end.
You personally must also file a self-assessment return each year to report your salary and dividend income and pay any personal tax due.
Running a limited company means two sets of filing obligations rather than one, which is one reason working with a specialist accountant makes a significant difference.
IR35: the income tax risk for limited company consultants
If you operate through a limited company, IR35 is something you cannot ignore.
IR35 is HMRC’s off-payroll working legislation. If you are working outside IR35, your limited company structure and its tax efficiencies apply as normal. If HMRC determines that your working relationship with a client resembles employment rather than genuine self-employment, you may be treated as inside IR35, meaning you pay tax and National Insurance as if you were an employee. The tax efficiency of your limited company structure disappears entirely.
The key factors HMRC considers include how much control your client has over your work, whether you can send a substitute, and whether you bear genuine financial risk.
Getting your IR35 position right is not just a compliance issue. It can have a very significant impact on your overall income tax position.
Find out more about how we support IT consultants and contractors here.
Making Tax Digital: what is coming
From April 2026, self-employed consultants with qualifying income above £50,000 will be required to follow Making Tax Digital rules, with those earning above £30,000 following from April 2027. This means keeping digital records and submitting quarterly updates to HMRC rather than a single annual return.
The exact requirements depend on your income level and business structure, so it is worth verifying how the rules apply to your specific situation well ahead of the deadlines.
APH can help you get MTD ready well ahead of time. Speak to us to find out what you need to do.
Do you need a specialist accountant?
You can manage your own income tax as a consultant. Many people do.
But the question is not whether you can. It is whether you should.
A specialist consultant accountant makes sure your structure is right, your expenses are fully captured, your IR35 position is understood, and your tax planning happens throughout the year rather than in a panic in January.
“I can’t recommend APH highly enough. They’ve been brilliant supporting me across two different businesses, handling everything from regular tax submissions and bookkeeping right through to restructuring shares and selling one of the companies.”
— Mike Waywell
“I have been using APH for 8 years now. They are, and always have been, excellent. Being a small business I do most of the paperwork behind the scenes and they always make sure everything is done correctly and on time.”
— Anna Cook
At APH, we work with consultants across the UK on a fully remote basis with fixed monthly fees and no jargon.
Book a free consultation call today.
Frequently asked questions
How much income tax does a consultant pay?
It depends on your income level and business structure. As a sole trader, you pay income tax at 20%, 40%, or 45% on profits above your personal allowance, plus Class 4 National Insurance. As a limited company consultant taking salary and dividends, your overall tax rate is typically lower. Our consultant tax calculator gives you an instant estimate based on your figures.
Is it better to be a sole trader or limited company for income tax purposes?
For many consultants, a limited company structure becomes worth reviewing seriously as profits grow. Around the £30,000 to £35,000 profit level is often a natural point to have that conversation, though the right answer depends on your individual circumstances. We can assess your specific situation and give you a clear recommendation.
What is the difference between income tax and corporation tax for consultants?
Income tax applies to your personal income, whether that is sole trader profits, salary, or dividends. Corporation tax applies to your limited company’s profits before you extract them. As a limited company consultant you may pay both, but the combined rate is typically lower than income tax and National Insurance as a sole trader at equivalent income levels.
When do I pay income tax as a self employed consultant?
Through self assessment, with the main payment due on 31st January following the end of the tax year. If your bill exceeds £1,000, you will also make two payments on account toward the following year’s bill, due on 31st January and 31st July.
Do limited company consultants still pay income tax?
Yes. Your company pays corporation tax on its profits. You personally pay income tax on any salary and dividend income you receive from the company through your annual self assessment return.