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| Financial Impact of IR35 on IT Contractors |
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If an IT Contractor's work is deemed to fall under the IR35 rules, the financial impact in terms of tax liabilities is considerable compared to those of a Contractor who falls outside the rules.
The IR35 rules target circumstances where a "worker" would be treated as a normal employee of the client, if it were not for the existence of the intermediary (the Limited Company).
A Limited Company contractor who falls outside the IR35 rules would typically withdraw a modest salary (net of employers + employee's NI, and income tax), with the bulk of income being derived from dividends.
For a contractor caught by IR35, all his yearly income to the end of the tax year will be treated as a salary (or "deemed payment"). Income Tax and National Insurance will be due on the entire amount - paid throughout the year.
Alongside standard Section 198 expenses (e.g. pensions payment, professional subscriptions, professional indemnity insurance), the Inland Revenue has also provided a standard "5% allowance" to cover the running costs of a limited company.
Corporation Tax and VAT are calculated in the normal way, regardless of IR35.
The difference in the take-home pay between a contractor inside IR35 and another outside is significant. For this reason, contractors should always seek professional advice before signing a contract, and ensuring that their contracts satisfy the Inland Revenue's definition of "self employed" work as per the IR35 employment status rules.
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