When working in the construction industry or using subcontractors and freelancers, it’s more than likely you’ve come across the IR35 rules.

Over the years, there have been additions to the rules. More recently, it was announced that some of the harsher guidelines would be repealed – but this move was scrapped following the change of Chancellor.

This article will explain what inside and outside IR35 means for you.

What are the rules?

IR35 is the term for two sets of tax legislation brought in by the Government to put an end to tax avoidance from workers and firms who supply services through limited companies and other intermediaries.

Mainly impacting construction, IR35 rules aim to stop cash-in-hand payments from escaping income tax and National Insurance contributions (NICs).

IR35 has undergone many changes since its inception in 2000. In 2017, rules were brought into the public sector, followed by the private sector in 2021. More recently, former Chancellor Kwasi Kwarteng announced that the Government would repeal the changes from 2017 and 2021 as of next year – but this move was cancelled by his successor, Jeremy Hunt.

Inside vs outside IR35

The differences between being inside and outside IR35 affect how workers and employers pay their taxes.

If a subcontractor or freelancer is inside IR35, the contract falls under the off-payroll rules. HMRC sees you as an employee for tax purposes, meaning your tax and NICs are deducted at the source of your pay.

That means that everything will be sorted through PAYE, and you won’t need to fill out a self-assessment at the end of the year.

When starting a new contract, you will need to reassess your IR35 status. If you and the business contracting you don’t pay the right amount of tax, you’ll both be liable to answer to HMRC.

Working outside IR35 will mean you are seen as legitimately self-employed. This means if you work through your own limited company, your client will pay the company, and you would in turn pay yourself after.

Similar to any small business owner, you’ll be responsible for paying any NICs and income tax from the gross payment from your client.

By working outside of the rules, you’ll be able to pay yourself a salary and also through dividends, which can help you to save on tax.

You will also be responsible for making sure any income tax, NICs and pension contributions are made once you’ve been paid by the employer.

Ask an expert

While the updated legislation is due to be repealed next year, the current rules are still in place.

If you’re unsure about your IR35 status, the team at Smith Butler is happy to talk you through the finer details and make sure you don’t run the risk of an investigation or fines from HMRC.

Get in touch with our team today.