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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.
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 :
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:
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.
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:
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.
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