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Contractor Tax Protection Tax Liability Cover (TLC35) and IR35 insurance from Qdos Consulting

Financial effect of IR35 on IT contractors

Published on Feb 18, 2008 |

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There is a considerable difference in the tax and national insurance liabilities of a contractor caught by the IR35 rules, and another who falls outside the IR35 net.

In a nutshell, IR35 was created to clamp down on 'disguised employment', to prevent contractors and others who would typically be viewed as 'employed' by HMRC from being taxed as if they were 'self employed'.

Outside IR35

An IT contractor who works via his own limited company, and whose contracts fall outside IR35, would typically pay himself a small salary (often attracting no PAYE tax, or national insurance liabilities), and derive the most of his income from company dividends.

Inside IR35

On the other hand, an IT contractor whose contracts fall within IR35 will draw down income in the form of a 'deemed payment'. He will have to pay income tax and national insurance contributions on the entire amount.

In addition, people caught by IR35 are granted a 5% expense allowance to cover the costs of running a limited company. They can also claim for standard 'Section 198' expenses such as pension contributions and PI insurance.

All limited company contractors should calculate their corporation tax and VAT liabilities in the normal way, regardless of whether they are caught by IR35 or not.

Significant Difference

There is a large difference in the take-home pay of contractors inside and outside IR35.

For obvious reasons, IT contractors should always seek professional advice before signing a contract, and ensure that both their contracts and their working practices both demonstrate that they fall outside the IR35 net.

We also recommend you read these more in-depth guides to IR35 compliance and determining employment status:

Further Reading

• Brief history of IR35
• Importance of IR35 status reviews
• IR35 contract review services
• Are you caught by IR35?