What is different about tax for software developers
Software developers can earn in several ways: day-rate contracts, fixed-price projects, freelance work for overseas clients, and income from their own apps and SaaS products. Each route is taxed differently, and four questions come up again and again:
- Does IR35 apply to this contract? It decides whether a limited company actually saves you anything.
- Limited company or sole trader? With 2026/27 dividend rates, the answer depends on how much profit you leave in the business.
- How do I handle VAT for overseas clients and app sales? Business clients abroad and consumers abroad follow different rules.
- Can I claim R&D tax relief? Sometimes, for your own products. Rarely, for client work.
IR35 and the off-payroll working rules
The off-payroll working rules, known as IR35, apply when you provide services through your own company but would be an employee if you worked for the client directly. They apply contract by contract, so one engagement can be inside and the next outside.
Who decides depends on the client:
- Public sector, or a medium or large private sector client: the client decides, and must give you a status determination statement with its reasons. If you are inside, the deemed employer (the client or the agency paying your company) deducts income tax and employee National Insurance from your fees and pays employer National Insurance.
- Small private sector client: your own company decides and applies the rules.
- Client wholly outside the UK: the client does not consider the rules; your company must consider whether the original IR35 rules for intermediaries apply.
HMRC's Check Employment Status for Tax (CEST) tool gives HMRC's view, and HMRC stands by the result if the information you give is accurate. Try our inside vs outside IR35 quick assessment, and read our contractor accountants page if contracting is your main income. Deemed employers do not deduct student loan repayments, so an inside-IR35 contractor with a loan must register for Self Assessment to repay it.
Limited company or sole trader: a worked 2026/27 example
Take a developer billing £75,000 in 2026/27 on contracts outside IR35, with £3,000 of expenses (laptop, software, insurance), no other income and no associated companies.
Through a limited company
- Salary: £12,570. No income tax (personal allowance) and no employee National Insurance (primary threshold £12,570).
- Employer National Insurance: (£12,570 minus £5,000) x 15% = £1,135.50. A company whose only employee is its director cannot claim Employment Allowance, so this is payable.
- Taxable profit: £75,000 minus £3,000 minus £12,570 minus £1,135.50 = £58,294.50.
- Corporation Tax: marginal relief applies between £50,000 and £250,000. 25% x £58,294.50 = £14,573.625, less marginal relief of 3/200 x (£250,000 minus £58,294.50) = £2,875.5825, gives £11,698.04. Profit after tax is £46,596.46.
- Dividend: £37,700 fills the basic rate band (£12,570 plus £37,700 = £50,270). The first £500 is tax free and £37,200 is taxed at 10.75%: £3,999.
You keep £46,271 (£12,570 plus £37,700 minus £3,999), and £8,896.46 stays in the company.
As a sole trader
- Profit: £75,000 minus £3,000 = £72,000.
- Income tax: £37,700 x 20% = £7,540, plus (£72,000 minus £50,270) = £21,730 x 40% = £8,692. Total £16,232.
- Class 4 National Insurance: £37,700 x 6% = £2,262, plus £21,730 x 2% = £434.60. Total £2,696.60.
You keep £53,071.40 (£72,000 minus £16,232 minus £2,696.60).
What the numbers say
The company leaves you £46,271 in your pocket plus £8,896.46 in the business. If you took that £8,896.46 out as a dividend in the same year, 35.75% higher rate tax of £3,180.48 would leave £5,715.98, a total of £51,986.98. That is £1,084.42 less than the sole trader figure. So at this level a company pays off mainly if you leave profit in it and draw it in years when your income is lower, not if you spend everything you earn each year. Inside IR35 your fees are taxed much like employment income, so most of the company advantage disappears. These figures ignore pensions and other income; your accountant will run your own numbers. Our outside IR35 take-home pay calculator gives a quick estimate.
Allowable expenses for developers
| Cost | How it is treated |
|---|---|
| Laptops, monitors, test devices | Company: capital allowances, normally in full through the £1 million Annual Investment Allowance. Sole trader on the cash basis: an allowable expense. |
| Software licences, IDEs, SaaS tools | Allowable when used wholly and exclusively for the business |
| Cloud hosting, domains, API usage | Allowable business running costs |
| Mobile phone | Company: no taxable benefit for one phone where the contract is in the company's name. Sole trader: the business share of phone bills. |
| Training and courses | Sole trader: allowable if it keeps existing skills and technology knowledge up to date; not if it is for a new business area |
| Professional indemnity and other business insurance | Allowable |
| Client entertainment | Not deductible |
See can I expense a laptop for the detail on equipment.
VAT: overseas clients, subscriptions and app sales
Registration is compulsory once taxable turnover for the last 12 months goes over £90,000. The points that matter for developers:
- Business clients abroad. Development and consultancy for a business customer that belongs outside the UK is normally outside the scope of UK VAT, because the place of supply is where the customer belongs. Keep evidence they are in business, such as an EU VAT number.
- Tools billed from overseas. Business services you buy from suppliers outside the UK fall under the reverse charge. If you are not yet VAT registered, their value counts towards your £90,000 threshold, which catches developers with heavy cloud or tooling bills.
- Apps and SaaS sold to consumers. Digital services to consumers are taxed where the consumer is. For consumers in the EU you must either register for the Non-Union VAT MOSS scheme in one EU country or register in each country where you have customers. If you sell through a third-party app store or marketplace, the platform accounts for the VAT on those sales instead of you.
- Flat Rate Scheme. The rate for computer and IT consultancy or data processing is 14.5%. A business that spends less than 2% of flat rate turnover on goods, or over 2% but under £1,000 a year, is a limited cost business and must use 16.5%, which HMRC warns can mean paying more than standard accounting.
R&D tax relief for software development
Software can qualify for R&D relief, but only where a project seeks an advance in overall knowledge or capability in computer science, not just in your company, by resolving technological uncertainty that a competent professional could not readily work out. HMRC's software guidance says configuring existing software to your own requirements is unlikely to qualify, and a product is not an advance just because software was used to build it. Novel algorithms that significantly increase capability, or data architectures that go beyond what existing database engines can do, are the kind of work that can.
For accounting periods beginning on or after 1 April 2024:
- Merged scheme: a taxable expenditure credit of 20% of qualifying costs, available to trading companies paying Corporation Tax.
- Enhanced R&D intensive support: for loss-making SMEs whose R&D spend is at least 30% of total expenditure. It gives an extra 86% deduction and a payable credit of up to 14.5% of the surrenderable loss.
- Who can claim: only the company that decides the R&D is needed. If a client specifies the work, their company claims, not yours. That rules out most contract development.
- Qualifying costs: include staff salaries, bonuses, pension contributions and employer National Insurance, software licences, and data licence and cloud computing costs. Dividends are not staff costs. Payments to unconnected contractors count at 65%, and there are restrictions on R&D done abroad.
- PAYE cap: the credit in a period cannot exceed £20,000 plus 300% of the company's relevant PAYE and National Insurance liabilities, which limits claims for one-person companies paying mostly dividends.
- Process: a first-time claimer must send a claim notification within 6 months of the end of the period of account, and every claim needs an additional information form.
Only a company can claim; sole traders cannot, because the relief is given through Corporation Tax.
Key deadlines for 2026/27
| Who | What | When |
|---|---|---|
| Sole traders | Register a new self-employment that started in 2025/26 | 5 October 2026 |
| Sole traders and directors | 2025/26 Self Assessment return and payment | 31 January 2027 (second payment on account 31 July 2027) |
| Sole traders | Making Tax Digital for Income Tax quarterly updates if qualifying income was over £50,000 in 2024/25 | From 6 April 2026 (over £30,000 from April 2027; over £20,000 from April 2028) |
| Companies | Corporation Tax payment | 9 months and 1 day after the year end |
| Companies | CT600 and annual accounts | 12 months (CT600) and 9 months (accounts) after the year end |
| VAT registered | VAT return and payment | 1 calendar month and 7 days after each VAT period |
Read what is MTD for Income Tax if you are a sole trader over the threshold.
How GoForma helps software developers
GoForma is a UK online accountancy practice with ACCA and AAT qualified accountants, working with clients across the UK by phone, video, email and WhatsApp. We are rated 4.9 on Google from 72 reviews and 4.8 on Trustpilot from 142 reviews, and have filed more than 7,000 tax returns.
- Start Bundle, £88 a month plus VAT (50% off for the first 3 months): a dedicated accountant, year-end accounts and CT600, payroll for one director, and an IR35 review on every contract.
- Operate Bundle, £128 a month plus VAT: adds VAT returns, your Self Assessment, the confirmation statement and a London business address.
- Start Sole Trader, £44 a month plus VAT (50% off for the first 3 months), or £68 with MTD for Income Tax quarterly submissions or with VAT.
FreeAgent accounting software, worth £360 a year, is included in every package, and all packages are rolling monthly. Compare them on our packages page or book a free consultation.