IR35

About IR35

If you are a contractor you should pay careful attention to this legislation.

IR35 was announced in 1999 and is a piece of tax legislation that came in to effect April 2000.

The idea behind it was that HMRC took the view that some contractors were avoiding National Insurance by working via Personal Service Companies (one man Ltd Companies (PSC)) or Managed Service Companies (MSC).

The latter were outlawed by HMRC April 2008, basically PSC and MSC companies delivered a similar pay structure, contractors working under an MSC were paid the minimum wage and then the balance of their pay after expenses was paid as dividend. In a similar way people working via a PSC take a minimal salary, as a Director of a PSC you are not governed by the minimum wage and therefore Directors fees are often paid just over the Lower NIC threshold, this is to maintain the right to the full basic State Pension, the balance of income after expenses is paid as dividend. However unlike an MSC if you work via a PSC you do not need to take all of the dividend, you can leave cash in the company, (retained profit) this could be helpful in reducing your personal higher rate tax.

To combat this type of ‘tax efficient’ pay structure HMRC introduced IR35. HMRC took the view that many contractors were not ‘self-employed’ at all and were in fact disguised employees and as such should be taxed under PAYE.

It is important that you understand what HMRC consider to be ‘self-employed’ as

Contractors caught under this legislation can face a significant drop in their net income, this can be up to a 25% reduction in take home pay.

You should always seek expert advice and ensure any contract you undertake is within IR35, it is worth the few pounds it costs to get your contract checked by a specialist law firm as it could save you thousands of pounds in the long run.

What happens if you are already in your contract and it is caught under IR35?

Basically you will not be able to take any of the money earned under the caught contract as dividend. You will be allowed to make a 5% deduction from your gross fees for basic expenses, you will also be allowed other expenses provided you have receipts and they are ‘wholly, exclusively and necessary’ in the performance of your duties. The balance of fees after the 5% deduction and other expenses will be subject to PAYE, don’t forget you will pay ‘employers NIC’ in addition to PAYE and NIC as an ‘employee’, and this will reduce your take home pay significantly.