Tax, VAT and Limited Companies for Consultant Solicitors

One of the genuine appeals of consultancy is keeping more of your own money. But the structure you choose to practise through has a meaningful impact on how much you actually keep. This guide walks through the main decisions and the common pitfalls. It is not tax advice — please instruct a real accountant who knows the legal sector — but it should help you have a more useful conversation with them.

Sole trader or limited company?

The two realistic structures for a consultant solicitor are sole trader (self-employed individual) and limited company (you incorporate and the company contracts with the platform firm or, more usually, you contract with the firm personally and the company invoices you onwards). Most consultants end up with a limited company, but it isn't automatic.

Sole trader is simpler. You file a self-assessment tax return each year, pay income tax and Class 2 / Class 4 National Insurance on your profits, and that's broadly it. There's no separate company, no corporation tax, no dividend planning, no PAYE for yourself. The downside is that all of your profits are taxed in the year earned, at personal income tax rates, with no flexibility.

A limited company is more administratively involved but usually more tax-efficient once you're earning beyond roughly £60,000 to £80,000 of profit. The company pays corporation tax on its profits. You take a small salary and extract the rest as dividends, which are taxed at lower rates than equivalent salary. You can leave profits in the company and draw them in lower-income years. You can pay into a pension at higher levels through the company than you can personally. And, in the right circumstances, you can sell the company on retirement and benefit from business asset disposal relief.

The catch with limited companies for solicitors

Not every platform firm permits — or works well with — a limited company structure. Some prefer to contract with you personally and pay you as an individual self-employed consultant. Where the firm contracts with you personally, you can still operate a personal services company in the background, but the arrangements need to be set up carefully (and the IR35 / off-payroll working rules need consideration, though these are typically less of a concern for a genuine consultant solicitor than for IT contractors). Take advice. Don't guess.

VAT — the threshold question

If your annual taxable turnover exceeds the VAT threshold (currently £90,000 in the UK and reviewed annually), you must register for VAT. You can register voluntarily below that. For most commercial consultant solicitors — corporate, commercial, employment, dispute resolution — VAT is a non-issue: your clients are businesses, they recover the VAT, you charge it on your fees and remit it quarterly.

For consultants whose clients are mostly individuals — family, private client, residential property, personal injury — VAT can be a real competitive disadvantage, because individuals can't recover it. In those practices, the question of whether to register voluntarily below the threshold is genuinely commercial. Above the threshold you have no choice. Below it, weigh the input VAT recovery against the price disadvantage carefully.

Expenses — what's actually deductible

For a sole trader: anything wholly and exclusively for the purposes of the business is deductible. For a limited company: anything wholly and exclusively for the purposes of the trade. The standard list for a consultant solicitor covers professional subscriptions (Law Society, SRA fees, CPD), insurance excess if separately payable, accountancy and bookkeeping, business mileage, business use of mobile, home office costs (proportionally), business travel, client entertainment (limited rules), training and CPD outside the firm, and the cost of running your own website. Always keep receipts. Always.

The pension opportunity

One of the most significant advantages of a limited company structure for high-earning consultants is the pension contribution allowance. The company can pay up to the annual allowance (£60,000 for most people, plus carry forward of unused allowance from up to three previous years) into your pension as a deductible business expense, reducing corporation tax. For a senior consultant earning comfortably, this is often the single largest tax planning lever. It is also the one most consultants don't use properly because they don't talk to their accountant until March.

The HMRC gotchas

Three things consistently catch new consultants out. First: payments on account. HMRC will ask you to pay tax on next year's profits in advance, twice a year, on top of settling last year. Your second tax bill is always larger than your first. Plan cash flow accordingly. Second: the VAT trap of crossing the threshold mid-year — you must register within 30 days of the end of the month in which you cross. Watch your rolling 12-month turnover. Third: money in the company is not your money. Use a director's loan account properly or you'll find yourself with unexpected personal tax charges.

The bottom line

Get a good accountant who works with the legal profession. Pay them properly. Have a tax planning conversation in September, not March. Set aside tax money in a separate bank account every time an invoice is paid. Do those four things and the tax side of consultancy looks after itself.