What is IR35?
At the time of writing, IR35 is a set of UK tax legislations that are designed to prevent individuals who are deemed as employees, from avoiding tax through their own private limited company.
Why was IR35 introduced?
IR35 was first enforced in 2000 by the HMRC (Her Majesty’s Revenue and Customs) previously known as Inland Revenue (IR), with the aim to target workers considered to be ‘disguised’ employees. These employees are typically contractors who are self-employed, where they could take dividends from their own company and pay less in National Insurance Contributions (NIC) and Income tax. The HMRC had to ensure that those working as contractors were operating genuine limited companies or businesses.
Inside vs. Outside IR35
- You and your contract are deemed for tax purposes.
- Contractors are required to pay taxes at the same rate as an employee in the same tax bracket.
- You and your contract are deemed ‘self-employed’ for tax purposes.
- Contractors are free to pay themselves in a tax efficient way, generally through a mixture of salary and dividends taken from their limited company. They are responsible for ensuring both personal and company taxes are calculated correctly and paid on time.
Why does IR35 matter?
If HMRC catches you working on a ‘self-employed’ basis (Outside IR35) when you have been deemed to be ‘Inside IR35’, you must pay back tax that you owe, plus any penalties and interest.
Limitations of being a contractor under IR35
Compared to typical employees, you will miss out on:
- Sick pay or leave
- Holiday entitlement
- Company pensions
Read GOV.UK‘s Understanding off-payroll working (IR35).
Current state of work
A majority of clients in the public sector (local authority and government) and private sector (limited companies) require contractors to work inside IR35. In some instances end clients can offer work outside IR35 giving contractors flexibility to use their own business.
- End clients are required to deduct necessary Income taxes and NICs from your invoice before paying you.
- End clients or agencies who deem an advertised role that is off-payroll working rules (inside IR35), would suggest that you go via an umbrella company.
- Umbrella companies are used to solve complex payroll, taxes and administration issues for the end client by applying the off-payroll working rules.
Read our article on Umbrella Companies.
Nick Cheung ~ Marketing Executive
Buckingham Futures HQ
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