Working Inside IR35

Sometimes due to the contract and specified working practices you may need to work inside IR35. However, this doesn’t necessarily mean you shouldn’t work through a Limited company as there are still many benefits.

Obviously there are more tax benefits if you are working outside IR35 (which is fair enough considering the increased burden), however just because a specific contract is inside it doesn’t mean you should immediately turn to an umbrella company solution.

There are still quite a few benefits to operating inside IR35 and working through a Limited company vs using an umbrella company such as:

  • Take home pay should be slightly higher via a Limited company due to extra income gained from the Flat Rate VAT Scheme (click the link for a detailed breakdown of the FRS) which can often add thousands to your annual income, on a £100,000 contract it would add £2500 extra income. You can’t use the flat rate scheme if you use an umbrella company.
  • You only pay tax on 95% of your income rather than 100% via an Umbrella company, HMRC provide for a 5% allowance which is intended to help with the running costs of your company.
  • Umbrella company fees can be the same if not more than accountancy fees, many umbrella companies charge over £125+VAT per month and some even charge a percentage of your contract.
  • Contractors can make use of wider range of employer schemes such as: use of home expenses, cycle to work schemes, claim childcare vouchers and annual party allowance.
  • Just because this contract is inside it doesn’t necessarily mean other contracts that run concurrently and after, won’t be outside and you will have everything in place.

Due to the UK’s rather complex taxation system which includes various thresholds plus it’s likely that your expenses will be quite variable which does mean calculating take home pay isn’t always the simplest of processes. However, these are the various components that affect take home pay:

  1. Invoice value net of VAT
  2. Add any Flat rate scheme benefit
  3. Deduct 5% from the total (this is to cover the expenses of running your company, if you don’t expense the full 5% you’ll be liable for a small amount of corporation tax at 20%) 
  4. Deduct any expenses that you incurred in being able to do your job (travel and subsistence)
  5. Deduct any company pension payments
  6. Whatever is  left is your salary less employee NI and employers NI
  7. Add on whatever expenses and pension contributions you’ve made and this will be your approximate take home pay.

As an example, on a typical £100,000 per annum contract, with roughly £5,000 expenses and £5,000 pension contribution, take home amount will be roughly £65,000 (so around 65%), this is after you take into account the flat rate VAT scheme, employer’s/employees NI, income tax and any corporation tax on profits. Working outside IR35 this amount would be roughly 75% take home pay.

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If you are at all worried by IR35 or have any further questions please call our IR35 specialists on 01442 275789 or email newbusiness@sjdaccountancy.com. Alternatively, complete the below and we'll get back to you as soon as possible.

If you would like to have your contract reviewed please take a look our IR35 Contract Review Service.