If you're working as a contractor, especially in construction, you probably feel like you're paying more tax than your employed friends. And you're right. But it doesn't have to be that way.
The problem isn't that contractor tax rates are unfair (though they're steep). The problem is that most contractors don't maximise the reliefs and deductions available to them.
The CIS Problem
The Construction Industry Scheme (CIS) is a tax nightmare if you don't understand it. Your clients are probably holding back 20% of your invoices to pay to HMRC. That's fine in principle—you claim it back when you file your tax return. But most contractors never claim it back because they don't know how.
Here's what actually happens:
- You invoice for £10,000
- Client holds back £2,000 (20% CIS deduction)
- You get paid £8,000
- You file your tax return showing £10,000 income
- You claim the £2,000 CIS deduction against your tax liability
- HMRC owes you the £2,000 back
That's how it's supposed to work. But if you're not claiming the deduction on your tax return, you're just handing HMRC £2,000 per £10,000 of invoice value. It's free money for them.
Any accountant working with contractors should be meticulous about claiming every pound of CIS deduction. If yours isn't, you're leaving money on the table every single month.
Expenses You're Probably Missing
Being self-employed means you can claim almost any business expense. But most contractors miss half of them.
You can claim:
- Travel to jobs. Mileage, parking, fuel. Keep records. In 2026/27, you get 45p per mile for the first 10,000 miles.
- Vehicle expenses. If you use a van for work, fuel, maintenance, insurance, and repairs are all deductible.
- Tools and equipment. Anything under £500 is expensed as it's bought. Over £500 goes on capital allowances (more complex but often better tax relief).
- Work clothing. If it's specialist (high-visibility clothing, work boots) it's deductible. Normal clothes aren't.
- Phone and internet. A proportion of your personal phone/broadband bill if you use it for work. Most contractors claim £0 and should be claiming £200-400 a year.
- Home office. £4 per week simplified allowance, or actual expenses. Many contractors never claim this.
- Training and professional fees. Cost of staying qualified and accredited. Every year.
- Subscriptions and memberships. Professional body fees, health and safety certifications, memberships.
Add these up and they often run to £3,000-5,000 a year that contractors just ignore. That's £1,000-2,000 in tax that you don't need to pay.
Are You Better Off as a Limited Company?
This is the big question for contractors making decent money. At what point is incorporating as a limited company worth it?
Generally, once you're consistently making £50,000+ as a contractor, incorporation becomes worth considering. Here's why:
As a sole trader contractor making £70,000:
- Income tax: £11,050
- National Insurance: £6,725
- Total tax: £17,775
- Take-home: £52,225
As a limited company making £70,000 profit:
- Corporation tax on profit: £17,500
- Take salary + dividends: roughly £50,000 net after all taxes
- Leave £20,000 in company: no tax on this immediately
The maths look similar, but the limited company approach gives you flexibility. You can leave money in the company for slow months, for equipment investment, or for tax planning.
But incorporation also means more admin: payroll, Corporation Tax returns, Companies House filing. You need to factor that in.
The Structure Question
Some contractors work through multiple contracts a year. Some have regular clients who basically employ them. Your structure should match your business.
If you're genuinely self-employed (multiple clients, no control over how you work, no long-term contracts), sole trader status is usually fine if you're meticulous about claiming expenses.
If you're effectively employed by one agency or client, incorporation might make more sense—not for tax reasons alone, but for clarity and credibility.
The worst situation is being a contractor in name only, assigned to one client, doing what they tell you, but paying contractor tax rates. That's when you're really being squeezed. Talk to your accountant about whether your arrangement would survive HMRC scrutiny as genuine self-employment.
Working with an Accountant Who Gets It
The difference between a good contractor accountant and a mediocre one is huge. A good accountant will:
- Track every CIS deduction and claim it back
- Ask about expenses you haven't thought of
- Run the maths on whether incorporation would help
- Keep you compliant without overpaying
- Advise you on whether your contract looks sustainable to HMRC
A mediocre one will just file your return and send you a bill. You need the first type.
Key Takeaways
- Claim every CIS deduction. This alone can save £1,500+ a year.
- Track your expenses meticulously. You're probably missing £3,000+ a year.
- Once you're making £50,000+, run the numbers on incorporation. Sometimes it saves you money, sometimes it doesn't. You need to know.
- Work with an accountant who specialises in contractor tax. It's too complex to do yourself.
