Last year, new IR35 changes came into effect on 6 April 2021. Also known as the intermediaries legislation, IR35 is defined as off-payroll working by HMRC. IR35 is shorthand for the UK tax legislation that is designed to identify contractors and businesses which are avoiding paying the appropriate tax by working as disguised employees or are engaging works on a self-employed basis to disguise their true employment status. 

Tax compliance responsibilities will shift solely to the end client, creating huge potential liability for the client that previously did not exist.  End clients will also be required to carry out a procedure determine whether  self-employed individuals are genuinely self-employed or if they can be considered a full employee. 

IR35 rules are closely wed to contracting work. If you work as a contractor through a limited company you can pay corporation tax at 20%, claim business costs against your tax bill and avoid making National Insurance Contributions (NIC) by paying yourself through dividends.

Working as a contractor is often more tax efficient set up than working via an umbrella company or as an employee of a company. However, many contractors are working in the same way as employees and gaining a tax advantage over those working in the same manner as them but through PAYE.

What does inside IR35 mean?

To be operating inside IR35 means that, under the IR35 legislation, you must pay the same tax as an employee. This could also mean that you are entitled to the same rights entitled to employees such as minimum wage, maternity pay etc.

If you're found to be working inside IR35 you will typically have to pay a deemed payment of income tax at the end of the tax year to account for any tax deductions or National Insurance Contribution that an employee would have paid.

What does outside IR35 mean?

To be operating outside IR35 means that the IR35 legislation does not apply to you. This means that that you can pay yourself a salary and withdraw further income as dividends whilst your limited company pays tax only on its profits at 20% rate.

Things that indicate you are outside IR35 and are operating like a business include having your own business insurance, marketing yourself via a professional website, owning your own equipment and working for multiple clients.

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