Let’s talk about a subject many contractors may dislike: IR35
IR35 was introduced to target disguised employment – such as an employee leaving their permanent position to rejoin the same company as a contractor within a short period of time, and thus pay less tax than a permanent employee taxed under PAYE.
The legislation determines whether a contractor operates inside or outside of IR35. HMRC are able to investigate a contractors status by reviewing their contract. Working relationship can also be considered at HMRC’s discretion in the event of an enquiry.
If a contractor is inside of IR35, HMRC will tax you as if you are an employee by calculating a deemed salary. You can continue to work as a contractor, and by claiming any allowable expenses, you will still be paying less tax than if you were a permanent employee of the company.
If outside, you have not been caught by IR35 and you can contract using a limited company vehicle and benefit from its tax advantages.
HMRC state the following expenses can be deducted from your deemed salary:
✓ Directors salary
✓ Contribution to an approved pension scheme
✓ HMRC allow 5% of your gross income to be additionally deducted as an expense
From 6 April 2016, contractors operating inside of IR35 are no longer able to claim travel and subsistence expenses.
Reputable agencies and companies should already have created IR35 compliant contracts, however, you must note that your contract should be a true reflection of your actual working practices with the end client. HMRC have previously interviewed end clients to determine a clients true working practise and subsequent IR35 status.How we can help?
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