Working Inside IR35
Finding out you're inside IR35 can feel like bad news but it doesn't have to derail your contracting career. Plenty of contractors work inside IR35 and still run successful businesses. The key is understanding what it means for your finances and how to operate compliantly.
We'll explain everything you need to know about working inside IR35 from tax implications to practical steps that keep you on the right side of HMRC.
What Working Inside IR35 Actually Means
When you're inside IR35 HMRC treats you as an employee for tax purposes even though you work through your own limited company. You're still self employed and running your own business but the way you pay tax changes significantly. The term 'disguised employment' gets thrown around a lot. Essentially HMRC believes that without your limited company in the middle you'd be an employee of your client. So they apply employment taxes to make sure you're paying the same as someone in a permanent role.
This isn't a punishment or a fine. It's about ensuring the right tax gets paid based on the actual nature of your working relationship.
How Your Tax Changes Inside IR35
The biggest change hits your tax bill. Income tax and National Insurance get deducted at source just like they would from an employee's salary. Your take home pay typically drops compared to working outside IR35.
Here's what changes for your finances:
- You pay income tax and both employee and employer National Insurance on your earnings. This happens before the money reaches your limited company.
- Dividend tax planning becomes largely irrelevant. Most of your income gets taxed at source so there's little left to distribute as dividends.
- You can still claim legitimate business expenses but the rules are stricter. Travel to your main place of work isn't deductible for example.
- Your company can claim the employment allowance in some cases which reduces the employer National Insurance burden slightly.
Who Decides Your IR35 Status
This depends on who you're working for and the size of the organisation. The rules changed in recent years so it's important to know who makes the determination.
- For large and medium companies in the private sector your client makes the status determination. They assess your role and tell you whether it's inside or outside IR35. You can challenge this but they make the initial decision.
- Small companies are different. If your client qualifies as small you're responsible for determining your own IR35 status. This puts the assessment and liability risk back on your shoulders.
- Public sector organisations always make their own determinations regardless of size. They've been doing this since 2017 so most have established processes in place.
The Status Determination Statement
When your client determines your status they must provide a Status Determination Statement or SDS. This document explains their decision and the reasoning behind it. You have the right to challenge this determination if you disagree. Your client must have a process for dealing with challenges and they need to respond within 45 days. Keep in mind that challenging doesn't guarantee they'll change their decision.
If no SDS is provided the liability shifts up the supply chain. This motivates agencies and clients to get their paperwork right. Always ask for your SDS if you don't receive one.
Operating Compliantly Inside IR35
Working inside IR35 requires careful attention to compliance. You're still running a business but the rules are different.
Keep clear records of all income and how tax was deducted. Your accounts need to show deemed employment income separately from any other revenue streams. Continue operating your limited company properly. File accounts and returns on time maintain proper records and keep your company administration up to date. Being inside IR35 doesn't mean you can ignore company responsibilities.
Consider your expenses carefully. You can claim business expenses that you couldn't as an employee but be prepared to justify them. Things like training accountancy fees and professional insurance remain deductible.
Get Clarity on Your IR35 Status
Speak with an expert today and understand where you stand.
The Umbrella Company Alternative
Some contractors inside IR35 choose to work through umbrella companies instead of maintaining their own limited company. This can simplify administration but comes with trade offs. Umbrella companies handle all the tax calculations and deductions. You become their employee and they deal with the client or agency. It's straightforward but you lose control and typically pay fees for the service. Running your own limited company inside IR35 means more admin but you maintain independence. You can still work outside IR35 for other clients and you keep full control of your business.
Managing Multiple Contracts
Your IR35 status applies per contract not to your business as a whole. You might be inside IR35 for one client and outside for another. This is perfectly legal and quite common. Track each engagement separately in your accounts. Income from inside IR35 contracts gets taxed differently from outside IR35 work. Your accountant needs clear information to handle this correctly. Don't assume one determination affects another. Each client assesses their specific engagement with you. Even similar roles at different companies might have different determinations based on working practices.
Common Myths About Inside IR35
There's plenty of misunderstanding about what inside IR35 means. Let's clear up the most common myths.
You don't become your client's employee. You're still self employed running your own business. The determination only affects how you're taxed.
Your limited company doesn't become worthless. You can still use it for outside IR35 contracts other business ventures and to manage your affairs professionally. It's not permanent. If your working practices change or you move to a different contract your status can change too. Each engagement gets assessed on its own merits.You haven't done anything wrong. Being inside IR35 simply means your current working arrangement resembles employment. It's a tax classification not a judgment on your business.
Planning Your Next Move
Working inside IR35 doesn't have to be permanent. Understanding why you're inside helps you make informed decisions about future contracts.
Review the determination reasoning carefully. What factors led to the inside decision? Was it lack of substitution rights? Too much control from the client? Understanding this helps you negotiate better terms next time. Consider whether the role is worth it despite the tax implications. Some inside IR35 contracts offer high enough rates or valuable experience to justify the reduced take home pay.
Look for opportunities to demonstrate genuine business practices. Taking on multiple clients investing in your business and maintaining real independence can strengthen your position for future assessments.
Financial Planning Inside IR35
Your financial planning needs to adapt to inside IR35 realities. The predictable income can actually make some planning easier.
Budget based on net income after all deductions. There are fewer variables than outside IR35 so you can plan with more certainty.
Consider pension contributions carefully. You might be able to salary sacrifice into a pension which provides tax relief. Your accountant can advise on the most efficient approach.Build reserves for gaps between contracts. Without the dividend flexibility of outside IR35 you need cash reserves to cover downtime.
When to Accept Inside IR35 Contracts
Not every inside IR35 contract is worth avoiding. Sometimes they make good business sense despite the tax implications.
High value contracts might still provide good net income even after employment taxes. Run the numbers carefully including all costs and deductions.
Strategic value matters too. If a contract offers unique experience access to new sectors or prestigious clients it might be worth the tax hit.
Short term inside IR35 contracts can fill gaps between better opportunities. A few months inside IR35 beats no income while you search for outside roles.
The Reality of Inside IR35
Working inside IR35 is increasingly common especially in the private sector since the 2021 reforms. Many successful contractors operate inside IR35 for some or all of their contracts. The key is being informed and prepared. Understand the implications manage your finances accordingly and keep looking for opportunities that match your business goals. Inside IR35 is a tax status not a career limitation.
Remember you're still running a legitimate business. Maintain professional standards keep developing your skills and deliver excellent results. Your IR35 status doesn't define your value as a contractor. Focus on what you can control which is providing outstanding service to your clients regardless of how you're taxed.
