What is IR35 and how can it affect the tax a contractor pays?

Contractors falling inside of IR35 could see their net income reduced by up to 30%, so it’s important to have a good understanding of what IR35 is and how it works.

In a bid to encourage entrepreneurship, the government offers tax benefits to contractors working as limited companies to reduce the risks involved with setting up a business.

IR35 is a tax legislation that was introduced in 2000 to prevent contractors working under the same conditions as a permanent employee, but being paid through a limited company subsidiary, from gaining the same tax benefits.

If you are a private sector contractor then it is currently your responsibility to work out whether your contract falls inside or outside of IR35, but for public sector contractors it is the hirer’s responsibility.

Am I inside or outside of IR35?

Figuring out whether your contract falls inside or outside of IR35 can be difficult. The HMRC use a set of status tests to look at the contract and relationship between yourself and your hirer when making their decision. These tests look at things like your entitlement to benefits, the hours you work, obligation, and your other clients.

You can gain a rough idea of your status using the HMRC’s ‘employment status’ tool.

How will it affect the tax I pay?

So, how does your IR35 status affect the amount of tax you pay?

If your contract is deemed to be outside of IR35, then you will continue to receive the tax benefits associated with being a limited company.

However, if status tests deem you to be inside of IR35 then you will be taxed as an employee would be, with tax and national insurance contributions due on the entirety of your deemed salary, negating the tax benefits of being a limited company.

If you require help with limited company tax or IR35, get in touch with our team of accountants here at Michael Bell by giving us a call on 01484 690 730.