IR35 Explained
Tax legislation that targets contractors who work like employees but operate through their own limited company. If caught by IR35, you pay roughly the same tax and NI as an employee.
What is IR35?
IR35 (officially called the "off-payroll working rules") is anti-avoidance legislation introduced in 2000. It applies to contractors who provide services through an intermediary (usually a limited company) but who would be considered employees if they worked directly for the client. The rules ensure these workers pay similar levels of tax and NI to permanent employees doing the same work.
How it works
Since April 2021, medium and large private sector clients (not the contractor) are responsible for determining IR35 status. The client assesses whether the working arrangement resembles employment, using factors like control over how work is done, personal service (can you send a substitute?), and mutuality of obligation. If the engagement is "inside IR35", the fee-payer deducts Income Tax, employee NI and employer NI before paying the contractor. If "outside IR35", the contractor invoices as normal through their limited company.
Real example
Rob works as an IT contractor through his limited company, earning a day rate of £500. His client determines his role is inside IR35. On a monthly invoice of £10,000, the fee-payer deducts approximately £2,700 in tax and NI before paying the remaining £7,300 to his company. Outside IR35, Rob would take a small salary (£12,570) and the rest as dividends, paying significantly less tax overall.
Who does this affect?
Contractors working through personal service companies or other intermediaries. The rules apply to engagements with medium and large businesses (over £10.2m turnover, £5.1m assets, or 50+ employees). Small company clients are exempt, and the contractor retains responsibility for their own status determination. Around 500,000 contractors in the UK are potentially affected.
HMRC source
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