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How do I know if IR35 rules apply to me?

  • Publish Date: Posted over 4 years ago
  • Author:by Mark Smales

IR35 is a piece of tax regulation that comes into effect in April 2020 and aims to ensure that workers, who would have been an employee if they were providing their services directly to the client, pay broadly the same tax and national insurance contributions as employees.

Historically contractors have been able to operate through their own limited companies or similar tax efficient vehicles in order to reduce their personal tax liability and increase their net income. IR35 will mean that any worker who is effectively an employee of a client will pay income and national insurance tax – this may reduce your take home pay by up to 25%.

Can my status change?

Each assignment that you start will be assessed separately to see if it is inside IR35 (you will have to pay income and national insurance tax) or outside IR35 (you are exempt from income and national insurance tax). This means that your tax status can change every time you commence a new contract.

Your status can also change during a contract if the work you are doing or your personal circumstances change, e.g. you are contracted outside of IR35 for a project but finish the deliverables a week early and the client asks you to help out with another piece of work for a week. Accepting this additional work would require a new IR35 assessment and may require you to pay income and national insurance tax on any income earnt during this week.

How do I check if I am an employee?

NRG will work with the client to understand the job description and inform you during the application process if the contract is inside or outside IR35.  Unless the job description is then changed by the client it is not possible to amend the status of the work, even if it reduces your take home pay.

If you are used to working outside IR35 and not paying any income tax or national insurance, then the NRG consultant will be able to help you calculate your net pay before you accept the work.
HMRC has an online questionnaire that will help to clarify your status if you have any questions:

What are my options when offered a role that is inside IR35?

If the work is inside IR35 then you may choose to be paid via:

  • Standard PAYE – you will receive your net income and all income and national insurance taxes will be paid directly to HMRC

  • Work through an Umbrella company. The Umbrella company will deduct the income and national insurance taxes as well as their own fees but will provide you with a consistent employer if you regularly change assignments which may help you with mortgage applications

Will the client increase my pay or day rate to cover the increased tax?

Clients will review each contract on a case by case basis but cannot always increase the rate due to your personal tax situation.

How can I reduce the chances of HMRC investigating my status if I accept a contract outside IR35?

While you cannot affect HMRC investigations, you can ensure that you use good written contracts and working practices that demonstrate you have followed both the letter and spirit of the IR35 legislation.

NRG recommends that all contracts outside of IR35 are based on clear project deliverables and not on length of service. This will help you to demonstrate that you were not an employee and that you had a financial risk and reward for hitting agreed timescales.​