Trust Ledger Accounting LtdIR35 Explained for Contractors: What Inside or Outside IR35 Means
By Trust Ledger Accounting. Figures checked against GOV.UK and last updated on .
IR35 is the everyday name for the off-payroll working rules. They apply when you work for a client through your own limited company but would be an employee of that client if the company were not in between. Inside IR35 means the income from that contract is taxed in broadly the same way as an employee's pay. Outside IR35 means your company is paid in full and taxed as a normal business.
What IR35 is for
A contractor working through a limited company can take income as a mix of salary and dividends, which is taxed differently from an employee's wages. IR35 exists to make sure that someone who works like an employee pays broadly the same Income Tax and National Insurance as an employee, even when a company sits between them and the client. The rules look at each contract separately. Source: GOV.UK, understanding off-payroll working (IR35).
Who decides your status
| Your client is | Who decides |
|---|---|
| A public sector body | The client |
| A medium or large business | The client |
| A small business | Your own limited company |
When the client decides, it must give you its decision and its reasons in writing, in a document called a Status Determination Statement. If you work through an agency, the decision still belongs to the end client, not the agency. If you disagree, you can tell the client why, and it has to consider your reasons and respond.
When your own company decides, the responsibility for getting it right, and for any tax due if it is wrong, sits with your company.
What the decision is based on
Status depends on the written contract and on how the work is actually done. The questions usually asked are:
- Control. Does the client decide how, when and where you do the work, or do you?
- Substitution. Could you send someone else to do the work, or must it be you personally?
- Obligation. Must the client keep offering work and must you accept it, or does the engagement end when the project does?
- Business on your own account. Do you carry financial risk, use your own equipment, and work for more than one client?
No single answer settles it. HMRC provides a free tool, Check employment status for tax, that clients and contractors can use to test a contract.
What inside IR35 means
- Where the client makes the decision, the business that pays your company, either the client or the agency, takes off Income Tax and employee National Insurance before paying your invoice
- Where your own company makes the decision, it works out the tax and National Insurance due on that income and pays them to HMRC
- That income has already been taxed as employment income, so it must be recorded separately in your company's books to avoid being taxed again
- Travel and other expenses that an employee could not claim are generally not claimable against that contract
- You are taxed in a similar way to an employee, but you do not gain employment rights from the client
What outside IR35 means
- Your company is paid the full invoice with no tax taken off
- The company pays Corporation Tax on its profit after allowable expenses
- You choose how to take money out, usually as a salary and dividends, and pay personal tax on what you take
- The company's normal filings still apply: annual accounts, a Corporation Tax return and, if registered, VAT returns
What it means for take-home pay
On the same day rate, a contract inside IR35 generally leaves you with less than the same contract outside IR35, because more of the income is taxed as employment income and fewer expenses can be claimed. How much less depends on your rate, your other income and how you would otherwise have paid yourself, so compare the figures before accepting a rate. Many contractors ask for a higher rate when a role is inside IR35.
The current Corporation Tax and dividend tax figures are on our page for contractors and freelancers.
Records to keep
Keep these for every contract, whether it is inside or outside IR35:
- The signed contract, any schedules or statements of work, and every extension or renewal
- The Status Determination Statement, if the client issued one
- The dated result of any status check you or the client ran
- Evidence of how you actually work: who sets your hours, whose equipment you use, whether a substitute was ever used or offered
- Evidence that you are in business on your own account: other clients, business insurance, your own website or marketing, and invoices
- A note of anything that changes during the contract, such as a new role, manager or way of working
When to get a contract reviewed
- Before you sign a new contract or agree a renewal
- When your client is a small business and the decision is your company's to make
- When you disagree with a client's Status Determination Statement
- When the way you work changes part-way through a contract
- When one engagement keeps being extended and starts to look like a permanent role
A formal review is specialist work, usually done by an employment status adviser or tax specialist. We do not carry out contract reviews, but we can point you to someone who does, explain what each outcome means for your tax, and keep your accounts right either way.
Our monthly packages for limited company contractors start at £79 + VAT and include FreeAgent, the annual accounts, the Corporation Tax return and one director's Self Assessment.