IR35 - A breakdown of what this means for you.
If you enter a contract directly with an employer, you will earn a salary which would be conditional to Income Tax of up to 45% and National Insurance Contributions up to 12%.
If a limited company enters the same contract, then the tax rules change. The limited company will not be conditioned to National Insurance Contributions whatsoever. The company would make a profit on which it would pay business tax, which is currently at a rate of 19%. This means that a limited company would not be regarded as obtaining a salary. Nor would the limited company receive the same company benefits that an employee entering the same contact would.
IR35 can apply to anyone who works via a limited company to provide a client or organisation with a service. If the worker is deemed to be self-employed, they fall outside IR35 requirements. if the worker is deemed as a more permanent fixture, then they would earn a salary which would be conditioned to Income Tax and National Insurance, therefore inside IR35.
To be deemed as outside IR35, means that you operate as a genuine business, therefor operating outside of the IR35 rules. If this is the case then you are able to pay yourself a salary, draw the remainder of income as dividends and remain responsible for your taxes as usual.
Defining whether IR35 applies to your contract, however, is very complex. The 3 most important IR35 factors used by the HMRC when determining employment status are:
· Control and direction
Determining what degree of control or supervision does your client have over tasks, milestones and how and when contracted or day to day work is completed.
· Substitution / personal service
Establishing whether you are providing your personal service to an employer, or if your business is providing its service to a client, as opposed to the exclusive service of an individual. In this case, the right of substitution must be met as genuine, and this would determine the limited company’s service as outside IR35.
· Mutuality of obligation
Is the employer expecting you to undertake work when asked to do so, and are you expected to be given work on a constant basis? Or are you expecting a client to hire you and undertake a specific task with no expectation of further work being provided after the initial task is completed.
If you have any queries regarding IR35 then please get in touch with us: firstname.lastname@example.org, 0161 250 5760 where we can assist you further.