What is IR35
IR35 came into effect on the 6th April 2021, with the aim of preventing tax avoidance.
Individual employees receive a salary from their employer which is subject to Income Tax of up to 45% and National Insurance Contributions of up to 12%.
For limited companies the rules are different. Limited companies are not subject to National Insurance and are not viewed to be receiving a salary, so therefore are also not subject to Income Tax. Instead, limited companies pay Corporation Tax on their profits, which is at 19%.
Since April 2021 IR35 prevents every employee from setting up their own limited company in order to avoid paying higher levels of tax and National Insurance.
How to determine whether IR35 applies
It can be a complex issue to determine whether your contract falls inside or outside of IR35. There are 3 main principles that will determine your IR35 Status:
- Control: How much control does the client have over what, how, when and where you complete your contract and work?
- Substitution: Are you required to do the work yourself, or can somebody else be substituted in and work in your place?
- Mutuality of Obligation: Is your Client obliged to offer you work, and are you obliged to accept it?
If certain conditions are met under IR35, then your earnings are considered a salary rather than profit from a limited company, meaning that you are subject to Income Tax and National Insurance.
If you are considered to be outside of IR35, then you are operating as a genuine limited company and are outside of the rules of IR35.
Who Determines whether I am inside or outside of IR35?
The company that the contractor is contracted to is responsible for determining whether a role is inside or outside of IR35
How does the end-client determine whether I am inside or outside of IR35?
Many will use the CEST tool designed by HMRC to determine whether you are inside or outside of IR35
What happens if I am inside IR35?
If you are determined to be inside IR35 then you will be classified as ‘employed’ by the end-client for tax purposes. You will then pay Income Tax and National Insurance on a PAYE basis out of your Salary.
What happens if I am outside of IR35?
If you are determined to be outside of IR35, then you will be able to operate as a limited company. You will not be subject to Income Tax or National Insurance, as you will still be classified as self-employed for tax purposes.
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