If you’re an independent contractor and want to save taxes, you should work through a limited company. This process tends to be productive for those contractors who’re considered to be outside the Intermediaries Legislation (IR35). On contrary, if you are caught inside IR35, most probably you’d be paying more taxes.
Before discussing how take home pay UK will be affected by IR35, let’s talk about IR35 first, what’s its legislation and what factors put you outside or inside IR35.
If you’re confused whether you’re inside IR35 or outside for your next contract, speak to one of our tax-consultant for help.
What is IR35?
IR35 is the tax legislation that is created to stop tax avoidance. It is known as off-payroll working rules. It’s designed to find out whether a contractor is genuine or not and has taken the form of a disguised employee to avoid taxes.
As contractors get tax-efficient benefits. Though, they don’t usually receive employee benefits like holiday and sick pay etc but enjoy flexible working hours.
To avail these tax advantages, some contractors disguised themselves as self-employed while they’re just employees. To tackle this issue, HMRC has formed IR35.
How to know whether you’re inside or outside IR35?
To be considered outside from the IR35 as a limited company contractor, the below conditions should be met:
- Control: A Client should not have direct control over the contractor and the consultant should not be treated as an employee and should not be provided with the same benefits.
- Substitution Right: Consultant should have the choice to substitute someone if he’s unable to work.
- Non-Exclusive: The contractor can perform paid work for more than one client as per the contract.
- No mutuality of Obligation: Consultant would not provide his services outside statement of works. In this way, a client can not offer more work after the end of the agreement and the consultant is not obliged to accept that.
- Financial Risk: Consultant can show some financial risk around the delivery of the service, if the rework is needed, it’ll be done at the expense of consultants.
Take home pay UK while working outside IR35:
If your contract has taken you outside IR35, you can pay yourself a small salary and the remaining amount in the form of dividends. As it is one of the best tax-efficient ways to get paid.
Although, you need to make sure that you are paying tax within the deadlines.
How Take-home Pay UK is Affected by IR35?
If you’re caught by IR35, you can lose many of the advantages of working through a limited company. As in such case, your total salary will become subject to Income Tax and National Insurance Contributions.
However, by working through a limited company you can pay yourself dividends that are not subject to NIC.
And it is an obvious fact that the more you’ll pay tax, your take home pay UK will be less.
Additionally, you have to pay a deemed payment to HMRC for an extra tax and National Insurance Contributions that are due on contracts caught by IR35.
Extra care is need while working out a deemed payment. Therefore, it’ll advisable to take services of an accountant.
Steps to calculate Deemed Payments:
Here’re some basic steps to assist you to calculate deemed payments.
- Find out the contracts where IR35 was applied.
- Add all contracts with non-cash benefits
- Add any other cash from client or non-cash benefits where PAYE has not been deducted and benefits are not yet declared on P11D
- Deduct 5% from the total as allowance for running a limited company
- From the remaining, deduct pensions, travel expense, capital allowance, equipment and machinery etc.
- Further deductions from employer’s NICs that a company has already paid, salary, Class 1A NIC’s, salary and reimbursement of allowable expense or the benefits received after PAYE and NICs paid.
- If the remaining amount is negative the deemed payment is due.
- If it’s positive, further calculations are required to find out your payments.
Again, before you start calculating deemed payment you should take expert advice here.
Quick Wrap Up:
No matter if you’re new to the contracting industry or you’re an experienced contractor, it is advisable to take professional advice regarding IR35. As take home pay UK is affected by IR35 and you should get maximum benefits from your income.
Accotax is supporting contractors across the UK, including advice and guidelines on IR35. Get in touch with our team for help.
Disclaimer: This blog provides general information on IR35.