IR35 is tax legislation targeting ‘disguised employees’. A disguised employee is someone who operates as a permanent employee for a client but works through their own limited company to reap the tax benefits. As a contractor, you will be either ‘inside’ or ‘outside’ IR35. Outside means, you are operating as a legitimate business, and therefore outside of IR35 rules.

If you are ‘inside’ IR35, this means you are considered, for tax purposes, an employee of your customer. This means you are required by law to pay tax and national insurance contributions on your income the same as an employee would, i.e. through PAYE. The point of which is you receive no tax advantage in the process.

If you are found to be inside IR35, it’s important to stress this does not mean you are operating illegally. This is classed as a form of tax avoidance, not evasion. Avoidance can be by accident or the product of misinformation. HMRC knows this.

Am I inside?

You should seek the professional advice of a Chartered accountant to determine this, but as a general rule of thumb, contracts which strike similarities to full-time employment are often deemed inside IR35. You can also check employment status for tax here.

What all this means

If you are outside IR35, you can continue to pay yourself tax efficiently with a salary and dividends in any combination you set yourself.
If you are inside IR35, you are required to calculate a ‘deemed payment’. This is the amount you have earned through the contract in question. It includes your PAYE salary, any pension contributions, and a 5% expense allowance. Anything left over must be treated as if it were salary from an employer. There is no extra leeway.

Don’t be afraid to start up

If you want to set up a limited company but are concerned about IR35 tax changes, we would stress that IR35 is of no risk to legitimate operators whose role in contracts is not akin to a regular employee. If you’re going to operate in a way a self-employed person would, you have nothing to fear from IR35. You’ll be outside the rules.
So why not get started? You can search for a company name and incorporate your limited company in 10 minutes with the MachFast app. Download it for free today, and you’ll even have the opportunity to set up a business current account at the same time. It’s the easiest and fastest way to set up a company.