What Is IR35?

Key takeaways

• IR35 is a UK tax law designed to ensure that contractors who work like employees pay similar taxes by assessing criteria such as supervision, substitution possibilities, and control over work

• Being inside IR35 means being treated as an employee for tax purposes, affecting financial management and missing out on tax benefits like drawing dividends

• Contractors outside IR35 enjoy tax efficiency through salary and dividends, must demonstrate work independence, and require ongoing vigilance to maintain their status

How does the IR35 work?

IR35 is a UK tax legislation that identifies if a contractor is essentially an employee for tax purposes when engaged by a client. This determination relies on criteria such as the level of supervision, the possibility of substitution, and the degree of control over the work.

Assessment criteria: IR35 assesses if a contractor should be considered an employee. It examines the amount of supervision, the ability to use a substitute, and the control over work execution

Tax implications: Being inside IR35 means the contractor is seen as an employee for tax purposes. The engaging company must then handle tax and National Insurance deductions directly from the payment

Sector differences: IR35 application differs between public and private sectors. In the public sector, the engaging entity usually determines IR35 status and manages deductions. In the private sector, particularly in small companies, the contractor often has to determine their own IR35 status

What does inside IR35 mean?

When classified as inside IR35, you are seen as an employee for tax purposes, despite being a contractor. This status impacts how you manage your finances and taxes. Contractors within IR35 miss out on certain tax benefits available to those outside the legislation. For example, they cannot draw dividends, a more tax-efficient income method than a salary. It is vital to ensure your contracts and working practices clearly establish your independence from your client. This helps avoid unintentional classification under IR35 rules.

What does outside IR35 mean?

Being classified outside IR35 offers several advantages, particularly in how contractors manage and receive their earnings. Here are the key points to understand about this status:

Tax efficiency: Contractors outside IR35 can pay themselves with a mix of salary and dividends. This method is generally more tax-efficient, allowing for potentially greater take-home pay than being on a company payroll

Evidence of independence: To maintain an outside IR35 status, demonstrating clear independence in your work arrangements is crucial. This includes having control over how you execute your tasks, rather than following strict company directives

Ongoing vigilance: Ensuring you remain outside IR35 requires continuous monitoring. Regular assessments of your work arrangements and seeking professional legal advice can help affirm your status and prevent potential challenges.