As an individual, if you enter directly into a contract with an employer, you will receive a salary that would be subject to Income Tax of up to 45% and National Insurance Contributions of up to 12%.
If a limited company enters into the same contract then these tax rules are different. The limited company will make a profit on which it will pay business tax, which is currently 19% but most importantly it will not be subject to National Insurance Contributions at all. A limited company will not be viewed as receiving a salary.
IR35 is aimed at preventing every employee from setting up their own limited company in order to avoid National Insurance and the potentially higher levels of tax.
Determining whether IR35 applies to your contract is a complex matter. There are three key principles that will determine your IR35 status:
Supervision, Direction, and Control: What degree of supervision, direction and control does your client have over what, how, when and where you complete your contract and day to day work?
Substitution: Are you required to carry out the work yourself, or you can you send someone 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 (Inside IR35), then the earnings of the company are considered to be a ‘salary’ on which Income Tax and National Insurance Contributions are payable.If certain conditions are met under IR35 (Inside IR35), then the earnings of the company are considered to be a ‘salary’ on which Income Tax and National Insurance Contributions are payable.
To be ‘outside IR35’ means that you are operating as a genuine business, and therefore operating outside of the IR35 rules. If you are operating ‘outside IR35‘, you are able to pay yourself a salary, draw the remainder of income as dividends, and remain responsible for your taxes as usual
From April 6th 2020 the liability for making the IR35 determination in the private sector shifts from the contractor to the end-user / end-client. The end-client needs to provide the status determination (inside or outside IR35) to both the contractor and IST.
There are a lot of tools currently on the market which are designed to help the end-client make a determination although many end-clients use the CEST tool that was designed by HMRC.
Should the end-client determine the assignment is outside of IR35 then IST will pay your PSC without making PAYE deductions as you will still be classed as self-employed for the purposes of tax collection..
If you are deemed inside IR35 you will be classed as ‘employed’ for the purposes of tax. Searchability will be able to advise you on an approved umbrella company list who will deduct PAYE from your pay rate. There may also be a charge from the umbrella company for using their services.
If an end-client is a classified as a small business (Turnover no more than £10.2m, balance sheet does not exceed £5.1m and number of employees lower than 50) they do not need to determine the status and this would remain with your PSC.
With over 15 years’ experience within the contracting market, both in private and public sector our dedicated Contracts team will be more than happy to discuss your situation and be able to advise you accordingly for anything IR35 related.
Please contact us should you require any further assistance.
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