What is IR35 and the off-payroll working rules?

Operating as a self-employed individual through an intermediary or Personal Service Company (PSC), such as a limited company, and earning income through a combination of salary and dividends allows contractors to pay lower income tax rates and National Insurance than permanent employees. However, HMRC believed that too many individuals were taking advantage of this tax loophole and operating similarly to employees without paying the same taxes.

Therefore, IR35 was introduced in April 2000 as a way for the government to stop so-called ‘disguised employees’ from taking advantage of tax breaks that were not intended for them. If a contractor is deemed outside IR35, they’re genuinely self-employed and can operate as a director through their own PSC or limited company. However, if a contractor is inside IR35, they operate like a permanent employee. They must be taxed at source and receive a net salary like a permanent employee.

In April 2017, HMRC reformed the off-payroll working rules for the public sector. As part of the reforms, it became the responsibility of the end client to determine the contractors’ IR35 status. If a worker is deemed inside IR35, it is the responsibility of the fee-payer to account for and deduct the worker’s income tax and National Insurance Contributions and pay these to HMRC on the worker’s behalf.

In April 2021, HMRC reformed the off-payroll working rules for the private sector. From this point, all medium and large corporations in the private sector were responsible for determining the worker’s employment status and the fee-payer must deduct the taxes at source and pay these to HMRC. The only exception to the off-payroll working rules is if the private sector client has no UK presence and is based entirely overseas or if the private sector client meets the criteria for the small business exemption.

What is a Status Determination Statement?

A Status Determination Statement (SDS) is a document or email that states the outcome of an IR35 status assessment—either inside or outside IR35—and the reasons for that outcome. An SDS must be produced for each worker and for each individual contract. The SDS will state whether the assignment is inside IR35, and the worker must be paid via PAYE, or outside IR35, and the worker can operate via a limited company (if they wish).

The end client produces the SDS, which should be provided to you before you sign a contract or begin an engagement. The SDS will also be shared with the rest of the supply chain (for example, the recruitment agency or umbrella company), as the fee payer must also be made aware of the status determination.

The end client must exercise ‘reasonable care’ when determining the status. If the client fails to exercise reasonable care and the worker challenges the determination, the client may become liable for unpaid taxes if HMRC later determines this to be the case.

Outside IR35

Outside IR35 means that following a status determination, the contractor works independently and is engaged on a genuinely self-employed basis. If a contractor is deemed outside IR35, they can operate via their own limited company and get paid gross for the assignment. Working outside IR35 and becoming a director of a limited company is the most tax-efficient way to operate as a contractor, as you can pay yourself a combination of dividends and salary.

Inside IR35

If, following a status determination, you are inside IR35, it means that the terms of your engagement are similar to those of a permanent employee. You must get paid via PAYE, meaning you will pay income tax and employee National Insurance Contributions similarly to a permanent employee. The fee payer (usually the recruitment company or umbrella company) will deduct these taxes at source before making a net payment to your bank account for the work completed.

What are the benefits of using an umbrella company for your payroll when inside IR35?

Registering and working via an umbrella company is one of the easiest ways to work if your contract is inside IR35. You can be onboarded and ready to get paid for your assignments in under 10 minutes. You can also use the same umbrella company for different assignments with different agencies or end clients.

When you register with an umbrella company, you become an employee of theirs and have the same employment rights as any other employee in the UK. These benefits include statutory employee benefits such as sick pay or maternity/paternity pay and auto-enrolment into a pension scheme where you meet the qualifying criteria.

You will be paid via PAYE, and the umbrella company will deduct the required income tax and employee National Insurance amounts and pay this to HMRC on your behalf. It is important to note that the only thing that will differ between compliant umbrella companies is the margin, as all umbrella companies must make the same tax deductions set by HMRC. If a provider offers you significantly higher take-home pay, please be very careful – it is most likely a tax avoidance scheme that could land you in serious trouble with HMRC.

Churchill Knight Umbrella

If you are deemed inside IR35, working via an umbrella company is the easiest way to get paid as a contractor. Churchill Knight Umbrella is widely recognised for providing an efficient payroll service. It is the first choice umbrella company for thousands of contractors in the UK for the following reasons:

  • Compliance – We are an FCSA-accredited and SafeRec certified umbrella company, and this level of transparency allows you to check that you are paid compliantly each time you are paid.
  • Comprehensive service – As part of our service, you will receive free insurance cover worth £25 million, employee benefits including sick pay and maternity/paternity pay, Same Day Faster Payments, access to My Digital our online portal and app, a quick and easy registration, and ongoing support from our dedicated Onboarding and Customer Service teams.
  • Excellent online reputation—Churchill Knight Umbrella has an excellent online reputation, with fantastic reviews on Google and Trustpilot. We pay thousands of happy contractors every week, and you can register for our service with complete confidence that you will be well looked after.
  • Multiple services – We provide a range of services alongside our umbrella payroll to ensure you receive the required service. For example, we offer a salary sacrifice service for contractors interested in building their retirement funds, a CIS service for construction workers, and a driver payroll service for HGV and van drivers.

To learn more about our umbrella service, please call our friendly team on 01707 871622. You can also request a tailored take-home pay calculation or request a callback at a time that suits you.

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Looking for an accountant? Contact Churchill Knight & Associates Ltd today!

If you require the services of a professional accountant with FCSA accreditation, our sister company is the perfect fit. Founded in 1998, Churchill Knight & Associates specialises in multiple accountancy services, including contractor accountancy, CIS limited company accountancy, contractor accountancy, accountancy for landlords, and specialist services for landlords.

Please click on the button below to be taken to the contact page on the Churchill Knight & Associates Ltd website. Alternatively, please call 01707 871622 and ask our friendly team to discuss your requirements with you as part of a free, no-obligation consultation.

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