IR35 is a piece of tax legislation that came into effect in April 2020, designed to ensure that workers who would have been employees if they were providing services directly to a 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 to reduce personal tax liability and increase net income. Under IR35, any worker who is effectively an employee of a client must pay income tax and National Insurance contributions, which may reduce take-home pay by up to 25%.
Can My IR35 Status Change?
Each assignment is assessed separately to determine if it falls inside IR35 (where income tax and National Insurance contributions apply) or outside IR35 (where tax exemptions apply). This means that your IR35 status can change with every new contract.
Your status may also change during an ongoing contract if the nature of your work or your personal circumstances change. For example, if you are initially contracted outside of IR35 for a project but complete your deliverables a week early, and the client asks you to assist with additional work, this new work may require a fresh IR35 assessment. If deemed inside IR35, you will be required to pay income tax and National Insurance contributions on any earnings for that additional work.
How Do I Check If I Am an Employee?
NRG collaborates with clients to understand job descriptions and will inform you during the application process whether a contract is inside or outside IR35. Once the job description is set, the IR35 status of the work cannot be changed, even if it impacts your take-home pay.
If you are accustomed to working outside IR35 and not paying income tax or National Insurance in the same way as employees, an NRG consultant can help you calculate your expected net pay before you accept a role.
To further clarify your employment status, HMRC provides an online Check Employment Status for Tax (CEST) tool, which you can use to assess your IR35 status based on the details of your engagement.
What Are My Options If a Role Is Inside IR35?
If a contract is inside IR35, you may choose to be paid through one of the following methods:
Standard PAYE (Pay As You Earn): Your income tax and National Insurance contributions are deducted at source, and you receive your net income directly from the employer or agency.
Umbrella Company: An umbrella company processes your pay, deducting income tax and National Insurance as well as their own fees. This option provides the advantage of a consistent employer, which may be beneficial for securing mortgages and other financial applications.
Will the Client Increase My Pay to Offset the Tax Impact?
Clients review contracts on a case-by-case basis, but they are not obligated to increase pay rates based on personal tax situations. Some organisations may offer a higher rate to compensate for the additional tax burden, but this is not guaranteed.
How Can I Reduce the Risk of HMRC Investigating My Status?
While you cannot prevent an HMRC investigation, you can take proactive steps to ensure compliance with IR35 legislation. The best way to minimise risk is to have well-documented contracts and working arrangements that align with IR35 guidelines.
NRG recommends that contracts outside IR35 be structured around clearly defined project deliverables rather than ongoing service durations. This helps demonstrate that you are not functioning as an employee and that you bear financial risk and reward for meeting agreed project milestones.
By ensuring your contracts reflect genuine self-employment status and maintaining proper working practices, you can reduce the likelihood of an IR35 challenge from HMRC.
For more guidance on IR35 and how it may affect your contract work, contact NRG today.