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What is IR35 and what does it mean for contractors, freelancers and sole traders?

Introduced in April this year, the new off-payroll working rules may significantly change the economic landscape for contractors, freelancers and sole traders.

If you’re concerned about IR35, here’s everything you need to know.

What are the new off-payroll working rules?

A contractor who works like an employee – but is paid through a limited company – should broadly pay the same Income Tax and National Insurance Contributions (NICs) as other employees.

The legislation that governs this practice is known as IR35, or more commonly, the off-payroll working rules.

What’s changed?

As of 06 April 2021, medium and large-sized private sector employers are now responsible for determining whether IR35 rules apply – as well as the liability for any underpaid tax.

It was previously the responsibility of the contractor to determine their employment status.

Who do the new rules apply to?

You may be affected by these rules if you are:

• a worker who provides their services through their intermediary
• a client who receives services from a worker through their intermediary
• an agency providing workers’ services through their intermediary.

What is the impact of IR35 on workers?

It is estimated that around 500,000 contractors will be impacted by the legislation.

If an employer has determined that IR35 rules apply, Income Tax and employee National Insurance contributions must be deducted from your fees and paid to HMRC, but you won’t be awarded holiday pay or statutory leave.

This could potentially reduce take-home pay by as much as 25 per cent. You can, however, dispute the determination given if you disagree with it.

More information on disputes and determination can be found here.

How do I know if my client (the employer) is affected by the legislation?

The employer is responsible for determining your employment status – but only if they are affected by the rules.

While all public sector authorities are responsible for deciding if the rules apply, the legislation does not apply to private sector employers who do not meet at least two of the following:

• a turnover of £10.2 million or more;
• a balance sheet total of £5.1 million or more; or
• 50 employees or more.

If a worker provides services to a client who is not required to apply IR35, the worker’s intermediary will remain responsible for deciding the worker’s employment status and if the rules apply.

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