The basics of IR35
IR35 is a term that has been thrown around a lot in the world of business and employment in recent years, and it’s likely you’ve heard the term being used. But what is IR35, and how does it affect both businesses and workers?
What is IR35?
IR35 is a tax legislation introduced in the United Kingdom in 2000 to prevent “disguised employment”. It aims to ensure that contractors who work for a company but are essentially employees for all intents and purposes are taxed the same as an employee.
In other words, if a worker is found to be operating as an employee in all but name, they should pay tax and National Insurance contributions the same way as a regular employee.
How does IR35 work?
IR35 works by determining whether a contractor is working in a way that is similar to a permanent employee. If it is determined that they are, then they will be required to pay the same amount of tax and National Insurance contributions as a regular employee.
The key factor in determining whether or not a worker falls under IR35 is the nature of the working relationship between the contractor and the company. If the contractor works in a way that is more like an employee than a self-employed person, then they will be considered to be inside IR35.
Factors that determine whether or not a worker falls under IR35 include things like whether they have control over the work they do, whether they are able to work for other clients, and whether they have to follow the same rules and procedures as regular employees. You should also read about Inside IR35 and Outside IR35 as it can help you better understand this concept.
How does IR35 affect businesses?
IR35 can have a significant impact on businesses that employ contractors. If a contractor is found to be working inside IR35, then the business will be responsible for paying Employer’s National Insurance contributions, which can be a significant additional cost.
In addition, businesses will also need to take into account the extra administrative burden of dealing with IR35. This can include having to carry out employment status checks, issuing payslips, and ensuring that all taxes and National Insurance contributions are paid correctly and on time.
How does IR35 affect workers?
IR35 can also have a significant impact on workers. If a worker is found to be working inside IR35, then they will be required to pay the same amount of tax and National Insurance contributions as a regular employee.
This can mean that the worker takes home less money, as they will need to pay Employer’s National Insurance contributions, which they would not have to do if they were operating outside IR35. In addition, workers inside IR35 will not be able to claim certain tax deductions, such as travel and subsistence costs, which can also impact their take-home pay.
In conclusion, IR35 is an important piece of legislation that aims to ensure that contractors who are working in a way that is similar to an employee are taxed in the same way. It can have significant implications for both businesses and workers, so it is important to understand the basics of IR35 and how it works. Now that you know the basics, it’s time to discover when and how to apply the IR35 laws by reading about it in our next article – IR35: An Ultimate Guide To UK’s Tax Laws.
By taking the time to understand IR35, businesses, and workers can ensure that they stay on the right side of the law and avoid any potential penalties or additional costs.