IR35 Guide: What Is IR35

IR35 applies separately to each and every contract. You have to decide whether that particular engagement is actually disguised employment. If someone from outside looked at the work you are doing, and your relationship with your end-client, would you seem like an employee? Are there enough things (written in the contract, the type of work you’re doing, the responsibilities you have, etc) that point to you being properly self-employed?

If you decide that your engagement looks more like what a regular employee does, then it is safer to pay earnings as salary. If you don't it will be risky if HMRC choose you for an inspection: you'll owe the difference between the tax and NI already paid and what would be due as an employee. You might also be assessed for penalties and interest on top.

You’re probably thinking 'I’m a pukka, professional contractor, not a chancing wide-boy, so I’m OK'. That’s fine, and the fact that you’re one of our clients reinforces this – we try to avoid taking on chancing-wide-boys (or girls). HMRC indicate they consider IR35 should apply to 90% of freelancers working through agencies. This proportion is not backed up by the win stats for cases HMRC has pursued, so in reality the more specialist, short term, highly paid and independently managed your work the more likely IR35 won't apply.

If you've doubts about your status then one way to reduce risks is to pay yourself a higher amount as salary. The greater your salary the less incentive there will be for HMRC to come after you.

Deciding you're caught by IR35 and paying all earnings as salary isn't the end of the world; loads of freelancers come to this conclusion and the difference in tax is often not as much as you might think. IR35 doesn't affect the other benefits and tax breaks available.

Back to  IR35 Overview