IR35
Off-payroll working rules that determine if a contractor should be taxed as an employee, affecting those working through intermediaries.
Key Points
Detailed Explanation
IR35 is the name given to the off-payroll working rules that determine whether a contractor is genuinely self-employed or should be taxed as an employee. It affects those working through their own limited company or other intermediary.
If IR35 applies ('inside IR35'), you're taxed similarly to an employee - paying Income Tax and National Insurance at employee rates, even though you invoice through your company. You lose the tax advantages of taking dividends.
The rules look at factors like control (who decides how, when, and where work is done), substitution (can you send someone else to do the work?), and mutuality of obligation (is there ongoing work/payment expectation?).
Since April 2021, for medium and large private sector clients, the end client determines IR35 status - not the contractor. Small companies are exempt, with contractors still making their own determination.
Being caught inside IR35 can significantly reduce your take-home pay compared to being outside IR35. However, working through an umbrella company (always inside IR35) is often simpler and provides employment rights.
Practical Examples
- •Outside IR35: £100,000 revenue, pay 19% Corporation Tax on profits, take dividends at 8.75% = approx £75,000 net
- •Inside IR35: Same £100,000, treated as employment income, pay 40% Higher Rate Tax + 2% National Insurance = approx £58,000 net
- •Factors suggesting outside IR35: multiple clients, own equipment, able to send a substitute, project-based work with defined deliverables
Frequently Asked Questions
Related Terms
Income Tax
A progressive tax on your earnings, charged at 20%, 40%, or 45% depending on your income level (after personal allowance).
National Insurance (NI)
Mandatory contributions that fund State benefits including the State Pension, charged at different rates for employees, employers, and self-employed.
Dividend Tax
Tax on dividend income above the dividend allowance, charged at 8.75% (basic), 33.75% (higher), or 39.35% (additional).