If your contract work is caught by IR35, your tax bill will rise considerably. Here, we use our IR35 calculator to work out the financial impact on contractors earning between £250 and £1000 per day.
What happens if you’re caught by IR35?
If your contract work is caught by the Intermediaries Legislation (IR35), almost all of your earnings from that work will be taxed in the same way as an employee.
The legislation was put in place to tackle individuals who provide personal services via their own limited companies but are actually ’employees’ in disguise, i.e. their working practices and contract wording indicate that they’re not engaged in a true business-to-business manner.
As a result, almost all the tax benefits of trading via a limited company disappear if you fall within IR35’s scope. This remains the case, despite several recent tax assaults on limited company shareholders, most notably the April 2016 dividend tax hike.
If you are caught by IR35, your entire ‘deemed salary’ will be subject to income tax and NICs, whereas otherwise, you can pay yourself mainly in dividends, which aren’t subject to National Insurance Contributions (NICs).
The deemed payment calculation
At the end of each tax year, your company will need to work out the ‘deemed payment’ on the turnover received during the period, minus a fixed 5% allowance* to cover the costs of running the company and other deductions.
Certain other allowable expenses can be deducted from turnover before the deemed payment is calculated. These include pension contributions, travel and subsistence expenses.
After accounting for these costs, and any salary and Employers’ NICs already paid during the tax year, you will be left with a ‘deemed payment’.
If the deemed payment is greater than zero, you must pay further tax on this amount to HMRC.
You can find out more and download a deemed payment spreadsheet on the GOV.UK site.
* From 6th April 2017, limited company contractors working in the public sector are no longer be able to use the 5% allowance if their contracts are caught by IR35. This will be extended to IR35-caught private sector contractors from April 2020 onwards.
Calculating the cost of IR35
Using our IR35 Calculator, you can work out how IR35 could affect your take-home pay, depending on the amount you earn, and your annual expenses.
In this table you can see how IR35 affects your annual net take home pay at different levels of income (2019/20 tax year).
| Daily Rate | Outside IR35 | Inside IR35 | Extra Tax |
|---|---|---|---|
| £250 | £40,632 | £35,289 | £5,343 |
| £300 | £48,333 | £41,512 | £6,821 |
| £350 | £54,347 | £47,139 | £7,208 |
| £400 | £60,362 | £52,766 | £7,596 |
| £450 | £66,376 | £58,392 | £7,983 |
| £500 | £72,390 | £64,019 | £8,371 |
| £1000 | £125,401 | £113,340 | £12,061 |
In these examples, we have assumed that the contractor:
- Works 5 days per week, 44 weeks per year.
- Has £1,000 in annual allowable expenses.
- Makes £3,000 contributions to an allowable pension scheme.
- Takes a salary of £12,500 p.a. (when outside IR35)
Different assumptions and accounting methods are used by the various IR35 calculators available online (and some are just incorrect!), so talk to your own accountant to work out the impact on your take-home pay based on your own circumstances and expenses.
You can get comprehensive tax investigation (IR35) insurance for as little as £99 per year. A comprehensive option – TLC35 – will even cover the costs of any tax liabilities you may have. Take a look at the options here at Qdos.
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