Glossary

IR35

Krishna Prasad Dahal, Chartered Accountant

Reviewed by Krishna Prasad Dahal FCCA, ACA (ICAEW), FCA (ICAI India)ICAEW Council Member · Last reviewed

Definition

IR35, also called the off-payroll working rules, applies when a contractor works for a client through an intermediary, usually their own limited company, in a way that would count as employment if they were hired directly. When a contract is “inside IR35”, the contractor pays broadly the same Income Tax and National Insurance as an employee would. The client or the contractor’s company decides each contract’s status.

Who decides the status

  • Public sector clients, and medium or large private sector clients, decide the status and must give a status determination statement (SDS) with their reasons.
  • For small private sector clients, the contractor’s own company decides.

What changes inside IR35

Where the client or an agency is the deemed employer, it deducts Income Tax and employee National Insurance from the fees before paying the contractor’s company, and pays employer National Insurance to HMRC. The contractor can no longer take that income as a mix of modest salary and dividends, so take-home pay usually falls. The figures are compared in inside vs outside IR35 take-home pay.

Outside IR35, the contractor’s company is paid in full and the director decides how to draw the money.

SmartFiling’s accountant for contractors service includes help with IR35 and off-payroll working questions.

Related questions

  • What are the ways to take money out of a limited company? Salary, dividends, a director's loan and employer pension contributions, although income from an inside IR35 contract has already been taxed like salary.
  • Does IR35 apply to sole traders? No. The off-payroll rules cover contractors working through an intermediary such as a limited company; a sole trader's status is judged under the normal employment status tests.

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