It is understandable that many contractors remain concerned about how being inside or outside IR35 will affect them. Whether you are inside or outside can alter your tax contributions and take-home pay. Therefore, both client and contractors need to have a firm understanding of their working relationship to ensure it remains fair.
If you are caught by IR35 and are deemed to be inside, you will need to pay income tax and national insurance contributions to HMRC. You do this just as you would when operating as an employee through the PAYE system. The introduction of the IR35 legislation aimed to stop workers from taking advantage of self-employment benefits when they serve as employees. As a result, if you fall inside IR35, you will no longer be able to make your payments more efficient through the combination of a low salary and high dividends. This is where much of the controversy surrounding the IR35 legislation stems from as many contractors end up paying significantly more tax.
5% expenses allowance
One IR35 factor that is often overlooked is the 5% expense allowance. This is set out by HMRC for contractors that fall inside the legislation. The allowance is designed to enable contractors to claim back 5% of their generated income. It should cover the cost of running a company. However, this has recently been scrapped for contractors working in the public sector. They need to pay tax like any other employee. Those working in the private sector can still claim their 5% allowance to maximise their earnings post-tax.
Claiming tax relief
No matter whether you work in the public or private sector, contractors inside IR35 can claim tax relief on pension contributions made on the contractor’s behalf. But those inside IR35 cannot claim on everyday expenses like travel, mileage, hotels, and meals. This is a high-priority concern for HMRC who will reclassify these earnings. As a result, you will need to pay tax on any incorrectly claimed travel and subsistence allowances.
Many contractors would prefer to be found outside IR35 as you take home more. So, it is imperative that you are subject to a thorough and fair IR35 review which shows your employment status accurately. While you shouldn’t attempt to avoid tax payments by masking your true employment status, sometimes the line between self-employment and being an employee can be confusing. Having a contract assessment is a great way to show that you have operated ‘due diligence’ in determining whether you are inside or outside of IR35. It can reduce the risk of you running into penalties if HMRC challenges your IR35 status in the future.
The benefits of being inside IR35
While you may have to pay more tax, and your ability to reclaim travel and subsistence allowances are eliminated, there are still some benefits to being found within IR35.Firstly, it means the contractor or client cannot experience costly bills for back taxes, interest and penalties from HMRC if caught outside when they should be inside. It is also compatible with the VAT flat rate scheme. Flat-rate benefits can still be accessible when you are inside IR35.
If you want help determining your IR35 status, and how to maximise the benefits of your current situation, come to One Click Group. We can give you the expert advice you need to help you adapt your employment status to and keep you either inside or outside of IR35. Get in touch with us today on 0345557 1287 to see what we can do.
Along with over 13 years experience in the contractor payroll industry, and after spending most of his working life as a financial advisor in the regulated financial services industry, Mike has garnered an extensive network of contacts in the recruitment industry, many of whom trust both him and the One Click Group to handle their accounting. Mike has also been a member of various industry bodies throughout the years, such as the British Institute of Recruiters, in order to champion best practices across the contractor payroll industry.