Working inside IR35

You’ve probably heard of IR35 by now. But it’s likely that some of the details still seem a bit murky.

We’ve put together this article (and a full, in-depth downloadable guide) to guide you through the complicated tax legislation that is IR35. In it, we’ll focus on what it means to work ‘inside IR35’, and what you can do about it.

What is IR35?

Let’s start by defining IR35. The Intermediaries Legislation, better known as IR35, aims to identify if a contractor carries out their work as a self-employed individual or in a way that reflects employment - hence the phrase ‘disguised employment’.

HMRC thinks that contractors who act and work like employees should pay tax like an employee - cue the introduction of IR35 in 2000.

What does inside IR35 mean?

In simple terms, working inside IR35 means that the service you provide is deemed by HMRC to reflect a service of employment, not self-employment.

That means you’re likely to be taxed more, given that contractors operating inside the rules are considered employees for tax purposes.

But who is responsible for deciding if a contract is inside or outside of IR35? Since April 2017 in the public sector and April 2021 in the private sector, the responsibility for assessing IR35 status sits with the end hirer as they are the end-user of your services.

If your end client falls under the taxman’s definition of ‘small’, it will be your responsibility to set your own tax status.

Here are the details of what will be expected of you when working inside IR35 :

The fee payer will deduct PAYE tax and National Insurance from your invoice value (excluding VAT): If the assignment is found inside IR35, the fee payer (the entity that makes payment to your limited company) will be required to deduct PAYE Tax and National Insurance contributions before making payment of the net pay into your limited company. You will need to provide the remittance advice showing these deductions to your accountant so they can account for this correctly.
You will pay employment taxes: 95% of the income from an inside IR35 engagement must be treated as employment income. You (or your accountant) will need to calculate a deemed salary and make the required payroll submissions to HMRC.
You’ll be able to claim limited expenses: As a contractor working inside IR35, you cannot claim the same expenses that you can when working outside the rules. In 2017, the taxman introduced changes that mean travel and subsistence expenses, such as mileage, accommodation, meals and other ad-hoc costs, are not legitimate on inside IR35 contracts.
The 5% allowance is set to be scrapped for IR35: When working for a medium or large end hirer, this is not available.

Can I work through a limited company inside IR35?

You can work through a limited company, even if the contract is deemed to be inside IR35.

There are more tax benefits if you are working outside IR35 (which is fair enough considering the increased burden), but just because a specific contract is inside it doesn’t mean you should immediately turn to other solutions.

There are still quite a few benefits to operating inside IR35 and working through a limited company, rather than using an umbrella company (more information on umbrella companies later). Here are a few:

Take home pay should be slightly higher via a limited company due to extra income gained from the Flat Rate VAT Scheme, which can often add thousands to your annual income (on a £100,000 contract it would add £1,400 extra income). You will not benefit from the Flat Rate VAT Scheme if you work through an umbrella company.
Just because a contract is inside IR35, it doesn’t necessarily mean other contracts that run concurrently and after, won’t be outside and you will have everything in place.

Working through an umbrella company inside IR35

If your contract falls inside IR35, one of your options is to work through an umbrella company.

Working through an umbrella company can be a stress-free way of getting paid while you contract. The umbrella company will become your employer and ensure that you are paid a salary in line with the terms of that contract with your agency or end hirer. They will also make the necessary deductions and payment of PAYE Tax and National Insurance.

Employees of an umbrella company will get all the benefits and protections of employment, such as a workplace pension, holiday pay, maternity/paternity pay, amongst other employee benefits, while still retaining all the freedom of contracting.

To find out more about this way of working, visit our umbrella company resource hub.

Expenses when inside IR35

If you are working in the private sector, when calculating the ‘deemed salary’, certain expenses can be deducted from your contract income. To be clear, the following expenses have been mentioned by HMRC in various consultations and FAQ publications:

Employer contributions to approved pension schemes which attract tax relief in the normal way
The gross salary paid, plus any Employer's National Insurance contributions on both the salary paid and any deemed payments
5% of the gross income from relevant engagements to cover running costs
Any other expenses which do not fall within S336 ITEPA, but have another statutory route for a deduction, such as professional subscriptions and professional indemnity or personal liability insurance

For more advice

As a contractor, you may find that assignments vary in their IR35 status, meaning that you may decide to work flexibly between your limited company and umbrella employment. Caroola can help you stay agile via our margin free umbrella employment service, which is available in most of our accountancy packages.

Got a contract that you think might fall inside IR35? Take a look at our IR35 Contract Review Service.