Let’s face it; no one likes to pay tax, but avoiding it can lead to serious complications. If you’re a sole trader or contractor with your own limited company, then it’s important to know what tax you need to pay, and what you can claim back, such as your public liability insurance.
It’s always worth checking your employment status to avoid nasty surprises. Unpaid tax and national insurance is backdated, and if you have avoided payment there may be fines too.
What is IR35?
IR35 was set-up to stop tax avoidance and applies to sole traders and contractors. By following the IR35 guidelines, you will only pay the tax you owe.
If you provide a service as a contractor through your own limited company, you need to follow off-payroll worker rules (IR35).
Off-payroll worker rules also apply if you contract through an intermediary, such as:
• A partnership
• A person service company (PSC)
• An individual
This means you will have to manage your income tax and national insurance contributions. It’s crucial that you keep records of contracts carried out and payments received. It’s likely you will be working on different projects that involve different costs and rates of pay. The amount of tax and NI you owe will vary between these contracts.
Inside and outside IR35
As mentioned, understanding your employment status is the first step in working out how much tax you will need to pay.
To make this easier, HRMC has categorised tax regulations into two groups. Inside IR35 and outside IR35.
If your employment status falls inside IR35, the company that hired you is likely to be in the public sector. They will be responsible for checking your IR35 status. In some cases, tax and national insurance deductions will be made by them, not you. When inside IR35 you’re typically treated as an employee.
If you accept a contract in the private sector, your status is outside IR35, and you are responsible for checking what you owe.
However, it depends on the size of the private sector company.
In April 2021, changers were made to IR35. Small to medium-size business are now responsible for clarifying your status.
If the private sector company you’re contracted with has a,
- turnover of more than £10.2 million
- balance sheet of more than £5.1 million
- or more than 50 employees
they will be responsible for checking your IR35 tax requirements. For companies smaller than this, the responsibility lies with you.
If you take on a new contract and are unsure who is responsible for tax deductions, it’s always best to ask who you are contracted with. Preferably before work starts.
You can also use the online check your employment status tool. To do this, you will need the following information:
- Details of the contract
- The worker’s responsibilities
- Who decides what work needs to be done
- Who decides when, where and how the work is done
- How the worker will be paid
- If the engagement includes any corporate benefits or reimbursement for expenses
To sum up, if your status falls inside IR35, you’re usually treated as an employee. Tax and national insurance deductions are calculated for you, or deducted on your behalf.
If your status falls outside IR35, you probably run your own business and are responsible for deductions.
If you’re looking for more information on contracting, the Construction Industry Scheme has put together a useful guide. It covers a range of useful topics for contractors and subcontractors, including what you need to know when taking payments.
And remember, public and private companies will only work with tradespeople who are well protected. Having the correct contractor’s insurance and sole trader insurance will guarantee contracts you take on are as risk free as possible.
