As a freelancer, you might not have heard about IR35 but if you are self-employed and operating as a contractor, then it could be the case that IR35 is applicable to you. Therefore, it makes sense to find out what it is and how it might be relevant to you.
What is IR35?
IR35 is tax legislation and it has been designed to make sure that the right tax is paid by contractors who are not working as disguised employees or knowingly operating this way. It may be the case where contractors are offered a role and are then told they will be paid under an umbrella company. This is often the case as it is more tax-efficient for them to take this approach and so, the contractor then becomes known as a disguised employee. As a result, the company won’t have to pay National Insurance contributions for you as well as holiday pay or sick leave.
Similarly, as a contractor operating as a limited company, a corporation tax of 20% will be paid on profits, while it’s possible to claim any business costs against your tax bill. This then means that you won’t need to make National Insurance contributions through the use of dividends.
Essentially, IR35 is designed to protect both the company and the contractor and it also means that the government will receive the tax it is entitled to receive. However, this year will see new changes come into effect.
What Are the Changes?
As of 6 April 2021, both medium and large private sector employers were expected to determine whether employees would fall under IR35. If this was the case, they would then need to make sure they were paying the right amount of tax. For small businesses, the good news is that the changes won’t affect them, with small businesses being classed as those with fewer than 50 employees and a turnover of less than £10.2m.
However, for larger businesses that are impacted by the new rules, it can prove difficult to identify whether IR35 status applies or doesn’t apply to a contractor. What this means is that it is imperative for these businesses to obtain the right advice as this will ensure that they remain compliant and adhere to the new legislation.
For those employees who are considered inside IR35, they will have to manage their own contributions once the end of the tax year arrives while those who are outside of IR35, will need to pay their taxes fully.
Should you work through an agency which is known as an umbrella company, which could be a recruitment company, they should pay tax for you through PAYE. In contrast, sole traders such as freelancers that are not operating as a limited company, won’t have to concern themselves with IR35 as this tax is not applicable to you.
So, contractors will have to ensure that they determine their tax status when it comes to IR35 because ignoring it could lead to problems.