If you're a contractor or freelancer in the UK, or are considering becoming one, you've probably heard of IR35.
IR35 is a tax legislation that was introduced in 2000 to prevent tax avoidance by individuals who work through an intermediary, such as a personal service company, rather than as an employee.
In recent years, the legislation has become increasingly relevant to contractors, particularly in the context of the gig economy and the rise of self-employment. Here we explore what IR35 is and how it affects you as a candidate.
What is IR35?
IR35 is a tax legislation that applies to individuals who work through an intermediary, such as a personal service company (PSC), more commonly known as a limited company.
The legislation aims to prevent tax avoidance by individuals who would be considered employees if they were working directly for a client, but who instead work through an intermediary to benefit from tax advantages.
IR35 applies to all industries and sectors in the UK, and the legislation is enforced by HM Revenue & Customs (HMRC).
How does IR35 affect you as a candidate?
IR35 has significant implications for you as a candidate, particularly if you work through a PSC. If you are found to be operating ‘inside’ IR35, you will be deemed to be an employee for tax purposes, and you will be required to pay tax and national insurance contributions (NICs) as if you were an employee. This can reduce the amount of take-home pay for contractors and is why many prefer contracts which are deemed ‘outside’ of IR35.
The introduction of the IR35 reforms in the private sector in 2021 shifted responsibility for determining a contractor's employment status from the contractor to the end client. This means that many companies have reclassified contractors as employees to avoid the risk of non-compliance with IR35. In turn, this led to a decrease in the number of contractors working through PSCs and an increase in the number of contractors working through umbrella companies or as direct employees.
The 2023 budget made no mention of IR35 repeal as many have been lobbying, however changes to the annual pension allowance have made it more appealing for contractors to work through an umbrella company. Many contractors will now be able to access even greater tax and NIC savings if they are able to enter into pension salary-sacrifice agreements with an umbrella company.
At Spirehouse we partner with FSCA accredited umbrella companies who offer salary-sacrifice pension schemes and can give you additional advice on this subject.
What can you do to comply with IR35?
If you're a candidate working through a PSC, you should take steps to ensure that you comply with IR35 legislation. This includes:
Assessing your employment status to determine whether you are inside or outside IR35
Ensuring that your contract is drafted in a way that reflects the true nature of the working relationship
Providing evidence to support your assessment of employment status
Reviewing your working practices to ensure that they reflect the terms of the contract
Seeking professional advice from tax experts and legal professionals
In conclusion, it's important to take steps to ensure that you comply with IR35 legislation and seek professional advice to help you navigate the complex tax and legal issues that arise from the legislation.
Speak to us to help to protect your income and ensure that your contracting career remains viable in the face of changing tax legislation.
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