Inside IR35 vs Outside IR35

To determine a contractor’s employment and tax status, HMRC applies a process called IR35. Therefore, it is important to understand the phrases “inside IR35” and “outside IR35.” 

This article briefly explains what ‘inside IR35’ and ‘outside IR35’ mean. 

What is IR35? 

Rather than being on the payroll, some individuals register as limited companies to pay less tax. HMRC refers to them as “Disguised employees” who provide services on a self-employed basis through Personal Service Companies (PSCs). 

IR35 is the UK tax legislation that aims to prevent such employees from avoiding tax by disguising themselves as a limited company. HMRC, through an inquiry, determines whether a contractor is “inside IR35” or “outside IR35.”

What does it mean to be inside IR35?

When individuals are “inside IR35,” they are considered employees for tax purposes, and as a result, their PSC must make employee-level tax and National Insurance contributions. 

HMRC will use a payment calculator to calculate a contractor’s income tax and national insurance obligations if they conclude that the contractor is “within IR35.” The hiring company is responsible for PAYE collection and paying the contractor’s taxes to HMRC. 

Though contractors can continue operating as sole traders or owners of their limited companies, they cannot enjoy the tax advantages related to the original contract. 

What is outside IR35? 

If you are “outside IR35“, it means you are operating as a genuine business and, therefore, outside the purview of the IR35 rules. You can pay yourself a salary, take the remaining income as dividends, and continue to be tax-liable if you are working “outside IR35.”

What are the benefits of being outside IR35?

The benefits of being outside IR35 include the following: 

• Reduced tax obligations 
• Increased flexibility 
• Access to tax-efficient benefits 
• Freedom to work for multiple clients 

Inside IR35 Vs outside IR35 calculator

An inside or outside IR35 calculator is a tool that helps individuals and businesses determine the IR35 status of an employee who is providing services through a personal service company (PSC). 

The contractor enters a rate, specifies whether it is hourly or daily, and chooses whether it falls within or outside IR35. The calculator’s other uses include comparing tax bills for different job statuses and calculating the additional tax due within IR35.

Key factors to be considered to determine IR35 status: 

• Direction supervision and Control (DSC)
• Mutuality of Obligation
• Financial Risk and Reality

Contractor Calculator is an online calculating tool compatible with daily and hourly pay rates. It allows workers to compare inside and outside IR35 scenarios.