What Is Ir35 for Contractors
IR35 is a term that has been on the lips of many contractors and freelancers in recent years. The rules governing the taxation of these self-employed professionals have been updated and revised, and IR35 is at the heart of these changes. In this article, we will explain what IR35 is, how it works, and what it means for contractors.
What is IR35?
IR35 is a term used to describe the tax legislation introduced by the UK government in 2000. The aim of the legislation was to ensure that self-employed contractors and freelancers paid the same amount of tax as employees, if they were effectively providing the same services. Prior to the introduction of IR35, contractors and freelancers could set up their own limited company and pay themselves a lower salary, while taking the majority of their income as dividends, which were taxed at a lower rate.
How does IR35 work?
In essence, IR35 is designed to determine whether a contractor or freelancer should be treated as an employee for tax purposes. If a contractor is found to be “inside IR35”, they will be required to pay the same level of tax and national insurance contributions as an employee of the company they are working for. If they are “outside IR35”, they can continue to pay themselves a lower salary and take the majority of their income as dividends.
To determine whether a contractor is inside or outside IR35, HMRC looks at a range of factors, including:
– The nature of the work being carried out
– The way in which the work is being carried out
– The contractual arrangements between the contractor and the client
– The level of control the contractor has over their work
What does IR35 mean for contractors?
If you are a contractor or freelancer who is found to be inside IR35, it means that you will have to pay a higher level of tax and national insurance contributions. This can significantly reduce your take-home pay, and may mean that you need to adjust your rates or find alternative work.
However, being inside IR35 does come with some benefits. You may be entitled to employment rights such as sick pay, maternity or paternity leave, and pension contributions. This can provide some security and stability, particularly if you are working on long-term contracts.
If you are found to be outside IR35, you can continue to take advantage of the tax benefits associated with being self-employed. However, it is important to ensure that your contractual arrangements and working practices are in line with HMRC`s guidelines, so that you do not inadvertently find yourself inside IR35.
In Conclusion
IR35 is a complex and often confusing topic, particularly for self-employed contractors and freelancers. However, it is important to understand the legislation and its implications, in order to ensure that you are paying the correct level of tax and national insurance contributions. If you are unsure of your status under IR35, it is recommended that you seek advice from a specialist accountant or tax advisor.