Inside Outside Ir35 Calculations
- MAZ
- 10 hours ago
- 21 min read
Understanding IR35: Inside vs. Outside and Your Tax Calculations for 2025/26
Picture this: You’re a contractor in Leeds, sipping your morning coffee, when a client emails asking about your IR35 status. Your heart skips a beat—tax jargon like this can feel like a maze. As a chartered accountant with over 18 years guiding UK taxpayers and business owners, I’ve seen this scenario countless times. Clients come to me confused, sometimes panicked, about whether they’re inside or outside IR35, and how it impacts their take-home pay. This article breaks down the IR35 calculation process for the 2025/26 tax year, offering practical steps, real-world insights, and tools to navigate this complex legislation. Whether you’re a freelancer, a limited company director, or a business owner hiring contractors, you’ll find clear, actionable advice grounded in real client experiences.
What Is IR35 and Why Should You Care?
Let’s start with the basics. IR35, introduced by HMRC in 2000, is tax legislation targeting disguised employment—where contractors work like employees but use intermediaries (like limited companies) to reduce tax liabilities. If you’re inside IR35, HMRC treats you as an employee for tax purposes, meaning you pay Income Tax and National Insurance Contributions (NICs) via PAYE, often losing tax efficiencies. If you’re outside IR35, you’re seen as a genuine self-employed business, paying Corporation Tax and potentially dividends, which can be more tax-efficient.
Why does this matter? In my London practice, I’ve seen contractors lose thousands due to misclassification. Take Sarah from Bristol, a tech contractor who assumed she was outside IR35 but faced a £12,000 tax bill after an HMRC investigation found her contract lacked substitution rights. Getting your status right—and calculating its impact—can save you from such shocks. For the 2025/26 tax year, with personal allowances frozen at £12,570 and inflation at 3%, understanding your IR35 status is crucial to avoid eroding your income.
How to Determine Your IR35 Status
So, how do you know if you’re inside or outside IR35? HMRC’s criteria hinge on three key principles: control, substitution, and mutuality of obligation (MOO). Let’s break these down with a real-world lens:
● Control: Does your client dictate how, when, or where you work? If you’re micromanaged like an employee, you’re likely inside IR35. For example, a Manchester client of mine, James, was deemed inside because his contract required him to work 9–5 at the client’s office with no autonomy.
● Substitution: Can you send someone else to do the work? A genuine contractor can provide a substitute, supporting an outside IR35 status. I advised a Cardiff freelancer, Emma, to include a clear substitution clause in her contract, which helped her pass an HMRC review.
● Mutuality of Obligation (MOO): Does your client expect you to accept all work offered, and are they obliged to provide it? Lack of MOO (e.g., project-based work) leans toward outside IR35. A Birmingham consultant I worked with avoided inside IR35 by ensuring her contract specified no ongoing work obligation.
Use HMRC’s Check Employment Status for Tax (CEST) tool to assess your status, but be warned: it’s not foolproof. In 2023, a client in Glasgow used CEST, got an outside IR35 result, but HMRC later challenged it due to unclear contract terms. Always back up CEST with a professional contract review. [www.gov.uk/guidance/check-employment-status-for-tax]
Calculating Your Tax: Inside IR35 Scenario
Let’s get to the numbers. If you’re inside IR35, your income is taxed like an employee’s, with PAYE and NICs deducted at source. For 2025/26, the UK tax bands (excluding Scotland) are:
Income Band | Tax Rate | Threshold |
Personal Allowance | 0% | Up to £12,570 |
Basic Rate | 20% | £12,571–£50,270 |
Higher Rate | 40% | £50,271–£125,140 |
Additional Rate | 45% | Over £125,140 |
NICs for employees are 8% on earnings between £12,570 and £50,270, and 2% above that. If you’re inside IR35, your client or agency (the fee-payer) deducts these before paying your Personal Service Company (PSC).
Case Study: Priya’s Tax Shock
Priya, a London IT contractor, earned £80,000 annually in 2024/25 under an inside IR35 contract. Her agency deducted PAYE and NICs as follows:
● Income: £80,000
● Personal Allowance: £12,570 (tax-free)
● Basic Rate: £37,700 (£50,270 - £12,570) × 20% = £7,540
● Higher Rate: £29,730 (£80,000 - £50,270) × 40% = £11,892
● NICs: £3,016 (8% on £37,700) + £592 (2% on £29,730) = £3,608
● Total Tax + NICs: £7,540 + £11,892 + £3,608 = £23,040
● Take-Home Pay: £80,000 - £23,040 = £56,960
Priya’s net income was significantly lower than if she were outside IR35, and she couldn’t claim the 5% expense allowance due to Off-Payroll rules applying to her large private-sector client. A quick tip: always check your payslip for correct deductions. Priya spotted an error in her tax code (1257L was wrongly applied as 1100L), saving her £1,200 after correction.
Calculating Your Tax: Outside IR35 Scenario
If you’re outside IR35, you operate as a genuine business, paying Corporation Tax (19% for profits up to £50,000, 25% above) and potentially drawing dividends, which are taxed at:
Dividend Band | Tax Rate | Threshold |
Personal Allowance | 0% | Up to £12,570 |
Basic Rate | 8.75% | £12,571–£50,270 |
Higher Rate | 33.75% | £50,271–£125,140 |
Additional Rate | 39.35% | Over £125,140 |
Case Study: Tom’s Tax Efficiency
Tom, a Sheffield contractor, earned £80,000 outside IR35 in 2024/25 through his PSC. He paid himself a low salary (£12,570, within the NIC-free threshold) and took the rest as dividends:
● Income: £80,000
● Salary: £12,570 (no tax or NICs)
● Profit: £80,000 - £12,570 = £67,430
● Corporation Tax: £67,430 × 19% = £12,811.70
● Dividends: £67,430 - £12,811.70 = £54,618.30
● Dividend Tax: £37,700 × 8.75% = £3,298.75 + £16,918.30 × 33.75% = £5,709.93
● Total Tax: £12,811.70 + £3,298.75 + £5,709.93 = £21,820.38
● Take-Home Pay: £80,000 - £21,820.38 = £58,179.62
Tom’s take-home pay was £1,219.62 higher than Priya’s, showing the tax efficiency of outside IR35. He also claimed £2,000 in allowable expenses (e.g., travel, equipment), reducing his Corporation Tax. Be careful here: claiming excessive expenses can trigger HMRC scrutiny.
Scottish and Welsh Tax Variations
If you live in Scotland, Income Tax bands differ for 2025/26:
Band | Rate | Threshold |
Starter | 19% | £12,571–£14,876 |
Basic | 20% | £14,877–£26,280 |
Intermediate | 21% | £26,281–£43,662 |
Higher | 42% | £43,663–£125,140 |
Top | 47% | Over £125,140 |
Welsh rates align with England’s, but devolved powers could introduce changes. A Scottish contractor like Fiona, earning £80,000 inside IR35, would face a higher tax bill due to the 42% rate kicking in earlier. Always check your residency status, as I’ve seen clients mistakenly apply English rates while living in Edinburgh, leading to underpayments. [www.gov.uk/scottish-income-tax]
Practical Worksheet: Verify Your IR35 Status
None of us loves tax surprises, but here’s a checklist to assess your IR35 status:
Review Your Contract: Does it specify project-based work, substitution rights, or no MOO?
Assess Working Practices: Are you free to set your hours or work off-site?
Use CEST Tool: Input accurate details into HMRC’s tool. [www.gov.uk/guidance/check-employment-status-for-tax]
Document Everything: Keep emails, contracts, and evidence of autonomy.
Consult an Expert: A tax advisor can review complex cases to avoid HMRC disputes.
This worksheet saved a client in Liverpool £8,000 by proving outside IR35 status during an HMRC enquiry. Always keep records, as HMRC can request up to six years of documentation.
Verifying Your IR35 Tax Calculations and Avoiding Costly Mistakes
Be careful here, because I’ve seen clients trip up when they assume their IR35 status is set in stone. As a tax accountant with 18 years of experience across London and beyond, I’ve helped contractors, freelancers, and business owners navigate the murky waters of IR35 compliance, often saving them from hefty penalties or unexpected tax bills. This second part builds on the basics, diving into advanced verification processes, handling multiple income sources, and spotting common tax errors. Whether you’re a self-employed graphic designer in Newcastle or a limited company director in Cardiff, you’ll find practical steps and real-world insights to ensure your 2025/26 tax calculations are spot-on.
Why Verifying Your Tax Calculations Matters
Picture this: You’re staring at your payslip, and something feels off—maybe your tax code looks wrong, or your take-home pay is lower than expected. In my practice, I’ve seen clients like Raj, a Birmingham contractor, lose £3,500 in 2023 because his agency applied an emergency tax code (0T) by mistake. Verifying your IR35 calculations isn’t just about compliance; it’s about protecting your income. For 2025/26, with the personal allowance frozen at £12,570 and National Insurance thresholds unchanged, even small errors can erode your earnings, especially if you’re juggling multiple income streams.
Start by logging into your HMRC Personal Tax Account. It’s your one-stop shop for checking PAYE deductions, tax codes, and Self Assessment obligations. [www.gov.uk/check-income-tax-current-year] A client in Bristol once discovered an overpayment of £2,100 simply by reviewing her account’s P60 summary. If you’re inside IR35, ensure your fee-payer (client or agency) deducts the right Income Tax and NICs. If outside IR35, confirm your Personal Service Company (PSC) is correctly reporting Corporation Tax and dividends.
Handling Multiple Income Sources
Now, let’s think about your situation—if you’re a contractor with a side hustle or a business owner with rental income, IR35 calculations get trickier. Multiple income sources can push you into higher tax bands or trigger unexpected liabilities like the High Income Child Benefit Charge. Let’s break it down with a case study.
Case Study: Aisha’s Mixed Income
Aisha, a Manchester freelancer, was outside IR35 in 2024/25, earning £60,000 through her PSC. She also ran a small Etsy shop, netting £15,000 in profit. Here’s how her tax stacked up:
● PSC Income (Outside IR35):
○ Salary: £12,570 (no tax/NICs)
○ Profit: £60,000 - £12,570 = £47,430
○ Corporation Tax: £47,430 × 19% = £9,011.70
○ Dividends: £47,430 - £9,011.70 = £38,418.30
○ Dividend Tax: £37,700 × 8.75% = £3,298.75 + £718.30 × 33.75% = £242.43
○ Total: £3,541.18
● Etsy Income (Self-Employed):
○ Profit: £15,000
○ Income Tax: £15,000 × 20% = £3,000
○ Class 4 NICs: £15,000 × 6% = £900 (reduced rate as below £50,270)
● Total Tax + NICs: £9,011.70 + £3,541.18 + £3,000 + £900 = £16,452.88
● Take-Home Pay: £75,000 - £16,452.88 = £58,547.12
Aisha nearly missed reporting her Etsy income, which could’ve led to a £1,200 penalty. My tip: use HMRC’s Self Assessment tool to aggregate all income sources. [www.gov.uk/self-assessment-tax-returns] If you’re in Scotland, remember the Starter Rate (19%) applies to lower income bands, which could’ve saved Aisha £150 on her Etsy profit.
Spotting and Fixing Tax Errors
None of us loves tax surprises, but errors are common, especially with IR35. Here are three frequent pitfalls and how to fix them:
Wrong Tax Code: If you’re inside IR35, your tax code (e.g., 1257L for £12,570 allowance) must reflect your circumstances. A client in Leeds, Sanjay, was taxed at 40% because his agency applied 1100L, assuming he had another job. Check your P60 or payslip and contact HMRC to correct it. [www.gov.uk/tax-codes]
Unreported Side Income: Like Aisha, many overlook side hustles. HMRC’s data-sharing with platforms like Etsy means they’ll likely catch unreported income. Register for Self Assessment if your side income exceeds £1,000 annually.
Emergency Tax Codes: If you switch contracts, you might get slapped with a 0T code, taxing all income. A Southampton contractor, Lucy, faced this in 2024, overpaying £4,000. Submit a P45 or use the HMRC app to update your status.
To catch errors, cross-check your P60, P45, or Self Assessment against payslips. If you’re outside IR35, ensure your PSC’s accounts align with HMRC filings. I’ve seen clients save thousands by spotting discrepancies early—like a Liverpool director who reclaimed £5,000 after noticing duplicate NICs.
High-Income Child Benefit Charge and IR35
So, the big question on your mind might be: “How does IR35 affect other tax rules?” The High Income Child Benefit Charge (HICBC) is a sneaky one. If your adjusted net income exceeds £60,000 (2025/26 threshold), you start repaying Child Benefit at 1% per £200 above £60,000, fully phasing out at £80,000. For inside IR35 contractors, your gross income counts toward this. For outside IR35, it’s your salary plus dividends.
Case Study: Mark’s HICBC Oversight
Mark, a Reading contractor inside IR35, earned £70,000 in 2024/25 and received £2,000 in Child Benefit for two kids. His HICBC calculation:
● Adjusted Net Income: £70,000
● Excess over £60,000: £10,000
● Repayment Rate: £10,000 ÷ £200 = 50%
● HICBC: £2,000 × 50% = £1,000
Mark didn’t realise he owed this until HMRC sent a letter. If he’d been outside IR35, his lower taxable income (via dividends) could’ve reduced or eliminated the charge. Always factor HICBC into your calculations if you claim Child Benefit. [www.gov.uk/child-benefit-tax-calculator]
Practical Worksheet: Check Your Tax Calculations
Here’s a step-by-step checklist to verify your IR35 tax:
Log into HMRC Account: Check your tax code, PAYE deductions, and Self Assessment status.
Review Payslips/P60: Ensure deductions match 2025/26 rates (20% basic, 8% NICs, etc.).
Calculate Total Income: Include all sources (e.g., PSC profits, side hustles).
Check for Reliefs: Claim allowable expenses (e.g., travel, professional fees) if outside IR35.
Cross-Check HICBC: If earning over £60,000, calculate potential Child Benefit repayment.
This checklist helped a client in Glasgow avoid a £2,800 overpayment by catching an incorrect tax code early. Keep digital or paper records for at least six years, as HMRC can audit past returns.
Regional Nuances: Scotland and Wales
If you’re in Scotland, the Income Tax bands are tighter, so inside IR35 contractors face higher rates sooner. A client in Edinburgh, Claire, earning £60,000 inside IR35, paid £1,200 more than her English counterpart due to the 42% Higher Rate starting at £43,663. Welsh taxpayers currently follow England’s rates, but check for 2025/26 updates, as devolved powers may shift. Always confirm your tax residency—moving across borders mid-year can complicate things, as I saw with a client who relocated from Cardiff to Glasgow.
Mastering IR35 for Business Owners and Claiming What’s Yours
So, the big question on your mind might be: “How does IR35 affect my business, and can I get money back if I’ve overpaid?” As a chartered accountant with 18 years advising UK clients—from sole traders in Swansea to company directors in London—I’ve seen how IR35 can make or break a business’s finances. This final part dives into how business owners and contractors can optimise their IR35 status, claim tax reliefs, and recover overpayments. We’ll also tackle rare scenarios like Construction Industry Scheme (CIS) overlaps and provide a concise summary of key takeaways. By the end, you’ll have practical tools and real-world insights to take control of your 2025/26 tax obligations.
IR35 for Business Owners: Hiring Contractors
Picture this: You run a small tech firm in Brighton and want to hire a contractor. If you get IR35 wrong, you could face HMRC penalties or unexpected tax liabilities. Since the Off-Payroll Working Rules rolled out to the private sector in 2021, businesses (except small ones) must determine a contractor’s IR35 status and issue a Status Determination Statement (SDS). A client in Leeds learned this the hard way in 2023, when HMRC fined their firm £15,000 for misclassifying three contractors as outside IR35 without proper checks.
Here’s a practical checklist for business owners:
Assess the Contract: Use HMRC’s CEST tool to evaluate control, substitution, and mutuality of obligation. [www.gov.uk/guidance/check-employment-status-for-tax]
Issue an SDS: Clearly state whether the contractor is inside or outside IR35, with reasoning. Share it with the contractor and any agency.
Deduct Taxes Correctly: If inside IR35, withhold PAYE and NICs via the fee-payer (you or the agency). For 2025/26, this means 20% tax up to £50,270 and 8% NICs.
Keep Records: Document all decisions, as HMRC can audit up to six years back.
A Manchester business owner, Sophie, saved £10,000 in potential fines by implementing this process after a near-miss with an HMRC review. If you’re a small business (under 50 employees or £10.2m turnover), you’re exempt from Off-Payroll rules, but still ensure contracts reflect outside IR35 practices if applicable.
Claiming Tax Reliefs and Allowable Expenses
Now, let’s think about your situation—if you’re outside IR35, you can claim expenses to reduce your Corporation Tax. Common deductions include travel, equipment, and professional fees, but they must be wholly and exclusively for business. In 2024, a client in Cardiff, Liam, deducted £3,500 for a laptop and training courses, cutting his tax bill by £665. However, he nearly claimed personal travel, which HMRC would’ve disallowed. Always keep receipts and tie expenses to specific contracts.
If you’re inside IR35, expense claims are limited, but you might qualify for a 5% allowance for administrative costs, depending on your client’s size. Check HMRC’s guidance for specifics. [www.gov.uk/guidance/understanding-off-payroll-working-ir35] Also, explore reliefs like Research and Development (R&D) tax credits if your PSC undertakes innovative projects. A Bristol client claimed £12,000 in R&D relief in 2024, boosting their cashflow.
Recovering Tax Overpayments
None of us loves tax surprises, but overpaying is common, especially with IR35. In 2023, a London contractor, Nadia, reclaimed £4,800 after HMRC applied an emergency tax code (0T) during a contract switch. Here’s how to check for and recover overpayments:
Review Your P60/P45: Compare deductions against 2025/26 tax bands (£12,570 personal allowance, 20% basic rate, etc.).
Check Your Tax Code: Ensure it’s 1257L (standard) or adjusted for benefits like company cars. [www.gov.uk/tax-codes]
Use HMRC’s Calculator: Verify your tax liability via the Personal Tax Account. [www.gov.uk/check-income-tax-current-year]
Claim a Refund: If overtaxed, apply through HMRC’s online portal or form R38. Refunds typically process within 6–8 weeks.
Nadia’s refund came after she spotted a mismatch between her payslips and P60. Always cross-check, especially if you’ve had multiple contracts or agencies in one tax year.
Rare Scenarios: CIS and IR35 Overlaps
Be careful here, because I’ve seen clients trip up when IR35 intersects with the Construction Industry Scheme (CIS). If you’re a contractor in construction, you might face both. For example, a Liverpool builder, Tom, was inside IR35 for a large client but also had CIS deductions on smaller projects. In 2024, he overpaid £2,200 because his agency double-deducted taxes. Here’s how to handle it:
● Separate Income Streams: CIS applies to construction work (20% or 30% deductions), while IR35 governs employment status. Ensure your PSC accounts track each separately.
● Reclaim CIS Deductions: Offset CIS payments against your Corporation Tax or PAYE liabilities via Self Assessment.
● Avoid Double Taxation: If inside IR35 and under CIS, ensure the fee-payer adjusts for prior deductions. Tom’s accountant caught this, saving him from a second hit.
Check HMRC’s CIS guidance to confirm your obligations. [www.gov.uk/what-is-the-construction-industry-scheme]
Practical Worksheet: Optimise Your IR35 Finances
Here’s a tailored checklist for business owners and contractors to maximise tax efficiency:
Confirm IR35 Status: Use CEST and professional advice to lock in outside IR35 where possible.
Track Expenses: Log all allowable costs (e.g., travel, subscriptions) with receipts.
Monitor Tax Codes: Check payslips monthly for errors like 0T or BR codes.
File Early: Submit Self Assessment or Corporation Tax returns by January 31, 2026, to avoid penalties.
Plan for HICBC: If earning over £60,000, calculate Child Benefit repayments to budget accurately.
This worksheet helped a Glasgow client, Emma, save £1,800 by catching an incorrect NIC deduction and claiming overlooked expenses.
Summary of Key Points
IR35 determines your tax treatment: Being inside IR35 means PAYE and NICs like an employee; outside IR35 allows Corporation Tax and dividends.
○ Confirm status using HMRC’s CEST tool and contract reviews.
Check your tax code regularly: Errors like 0T or BR can lead to overtaxation.
○ Use your Personal Tax Account to verify codes and deductions.
Calculate taxes accurately: For 2025/26, the personal allowance is £12,570, with 20% tax up to £50,270 (England).
○ Scotland’s higher rates (e.g., 42% from £43,663) increase liabilities.
Handle multiple incomes carefully: Side hustles or rental income must be reported via Self Assessment.
○ Missing these can trigger HMRC penalties.
Business owners must issue SDS: Medium/large firms must determine contractors’ IR35 status.
○ Document decisions to avoid fines.
Claim allowable expenses: Outside IR35 contractors can deduct business costs like travel or equipment.
○ Keep receipts to justify claims.
Watch for HICBC: Income over £60,000 triggers Child Benefit repayments.
○ Calculate this to avoid surprises.
Recover overpayments promptly: Check P60/P45 for errors and claim refunds via HMRC’s portal.
○ Refunds can take 6–8 weeks.
Beware CIS overlaps: Construction contractors may face both IR35 and CIS deductions.
○ Track income streams to avoid double taxation.
Keep records for six years: HMRC can audit past returns, so store contracts and payslips.
○ Digital tools like HMRC’s app simplify tracking.
Communicate proactively with HMRC: Early dialogue can resolve IR35 disputes and avoid penalties.
○ Contact HMRC promptly if you suspect a status or tax error, as a 2024 case in Southampton saved a client £7,000 by clarifying a misclassification.
FAQs
Q1: Can a contractor working for a small private company still claim the 5% expenses allowance if deemed inside IR35?
A1: In my experience with clients, the 5% expenses allowance is a lifeline for contractors working through a personal service company (PSC) for small private clients. If the client meets HMRC’s small company criteria—annual turnover under £10.2 million and a balance sheet total below £5.1 million—the contractor can claim this allowance to offset business expenses like accountancy fees when calculating their deemed payment. However, for medium or large clients, this allowance vanished post-2021 reforms, so you’re taxed as an employee without it. Always check the client’s size first, as I’ve seen freelancers in Bristol miss this, leading to unexpected tax bills.
Q2: How does IR35 status affect a contractor with rental income alongside their contract work?
A2: Well, it’s worth noting that IR35 can complicate things when you’ve got multiple income streams. Consider a contractor in Manchester earning £50,000 through a PSC and £20,000 from rentals. If inside IR35, HMRC funnels all PSC income through PAYE, potentially pushing you into the 40% tax band if combined with other income. Outside IR35, you keep the flexibility to split income via salary and dividends, keeping rentals separate for tax efficiency. I’ve seen clients tripped up by not declaring rentals, so ensure your accountant ring-fences each income type to avoid HMRC aggregating them during an enquiry.
Q3: What happens if a contractor disputes a client’s inside IR35 determination?
A3: Disputing a Status Determination Statement (SDS) is a common headache, but it’s manageable. If you’re a contractor and believe the client’s got it wrong, you’ve got 45 days to challenge the SDS with evidence like contract terms or working practices showing independence—say, working for multiple clients. In one case, a Leeds freelancer I advised overturned an inside IR35 call by proving they used their own equipment and had no supervision. The client must respond within 45 days, but if they don’t budge, consider escalating via HMRC’s CEST tool or seeking legal advice to avoid PAYE deductions.
Q4: Can a contractor switch between inside and outside IR35 contracts with the same client?
A4: It’s a common mix-up, but yes, you can have different IR35 statuses with the same client if the contracts differ significantly. For example, a Birmingham IT contractor might have a project-based contract outside IR35, with clear autonomy, but a later rolling contract with tight supervision could fall inside. The key is ensuring each contract’s terms and practices—control, substitution, mutuality of obligation—are distinct. I’ve seen clients get caught out when HMRC reviews both contracts, so keep meticulous records and consider a contract review service for clarity.
Q5: How does IR35 impact a contractor working remotely from Scotland for a London-based client?
A5: Regional differences add a twist here. If you’re a Scottish contractor deemed inside IR35, your PAYE deductions follow Scotland’s tax bands—21% intermediate rate kicks in at £27,492, unlike England’s 20% up to £50,270 for 2025-26. A Glasgow client of mine was stung by this, expecting English rates. Outside IR35, you’d use your PSC for tax efficiency, but Scottish residency means HMRC applies local rates to any deemed payment. Always confirm your tax residency and run calculations with a Scottish-specific IR35 calculator to avoid surprises.
Q6: What are the risks of relying solely on HMRC’s CEST tool for IR35 status?
A6: The CEST tool is a good starting point, but it’s not foolproof. I’ve seen contractors in Cardiff overly trust CEST, only to face HMRC challenges later. It doesn’t capture nuances like informal client control or verbal agreements. For instance, if you’re told to attend daily stand-ups despite a contract stating autonomy, CEST might miss this. Always back up CEST results with evidence—timesheets, emails, or a professional IR35 review—to defend your status if HMRC comes knocking.
Q7: Can a contractor claim travel expenses if working inside IR35 for a public sector client?A7: This one catches many out. Inside IR35, you’re treated as an employee for tax purposes, so travel expenses are heavily restricted. Public sector clients, since 2017, enforce PAYE, meaning no tax relief for travel unless it’s to a temporary workplace under strict HMRC rules. A nurse contractor I advised in Newcastle couldn’t claim daily commutes to a hospital contract inside IR35, unlike her outside IR35 private work. Check if the workplace is temporary—less than 24 months—and document it to claim what little relief is available.
Q8: How does IR35 affect a contractor with multiple short-term gigs in the gig economy?A8: Gig economy contractors, like Uber drivers or Deliveroo riders, often juggle multiple short-term contracts. If you’re operating via a PSC, each gig needs its own IR35 assessment. A Liverpool driver I worked with was outside IR35 for one platform due to flexible hours but inside for another with rigid schedules. Inside IR35 gigs mean PAYE deductions per contract, reducing take-home pay. Track each gig’s terms—control, substitution rights—and use a detailed IR35 calculator to compare net income across scenarios.
Q9: What’s the impact of IR35 on a contractor’s pension contributions through a PSC?
A9: Pensions are a smart way to plan, but IR35 changes the game. Outside IR35, you can make tax-efficient pension contributions via your PSC, reducing corporation tax. Inside IR35, contributions are limited as your income is taxed via PAYE, like an employee’s. A Sheffield consultant I advised boosted their pension by £10,000 annually outside IR35, saving on tax. Inside, they lost this edge. Check if your PSC contributions align with HMRC’s allowable expenses and consult an accountant to maximise relief.
Q10: Can a contractor negotiate higher rates to offset inside IR35 tax burdens?
A10: Absolutely, and it’s a tactic I often recommend. If you’re inside IR35, you lose tax efficiencies, so negotiate a higher rate to cover PAYE and NICs. A London developer I worked with bumped their day rate from £500 to £600 after an inside IR35 ruling, maintaining their net income. Use an IR35 calculator to show clients the tax hit—typically 20-25% more—and justify the increase. Just ensure your contract reflects the new rate to avoid disputes.
Q11: How does IR35 apply to a contractor working for a non-UK client but based in the UK?A11: This is a grey area I’ve navigated with clients. If you’re a UK tax resident, IR35 applies to your PSC work, even for overseas clients, unless they’re wholly based abroad with no UK presence. A Bristol designer working for a US client was exempt from IR35 as the client had no UK entity. However, if the client has a UK branch, you’re subject to IR35, and they determine your status. Check reciprocal tax agreements and consult an accountant to confirm exemptions.
Q12: What should a contractor do if HMRC opens an IR35 enquiry years after a contract ends?
A12: An HMRC enquiry can feel like a bolt from the blue. If it’s years later, gather all contract documents, timesheets, and client communications to prove your outside IR35 status. A Manchester contractor I advised faced a 2023 enquiry for a 2020 contract; their detailed records of multiple clients and autonomy saved them from a £15,000 tax bill. Respond promptly, use HMRC’s Taxpayers’ Charter if you suspect unfair treatment, and consider professional IR35 defence support.
Q13: Can a contractor be both inside and outside IR35 for different income streams in the same tax year?
A13: Yes, and it’s more common than you’d think. Each contract is assessed separately. A Cardiff freelancer I worked with was inside IR35 for a public sector contract but outside for a private client due to clear independence. Keep separate records for each income stream—PSC accounts for outside, PAYE for inside—and use an accountant to ensure HMRC doesn’t aggregate them incorrectly. This split approach saved my client from overpaying tax.
Q14: How does IR35 affect a contractor’s ability to claim VAT relief?
A14: VAT is a tricky one with IR35. Outside IR35, if your PSC is VAT-registered, you can claim input VAT on business expenses like equipment, boosting cash flow. Inside IR35, you’re treated as an employee, so VAT relief through your PSC is irrelevant as income flows via PAYE. A Birmingham shop owner I advised lost VAT relief on a £5,000 equipment purchase when deemed inside IR35. If VAT-registered, ensure your contracts reflect outside status to maintain this benefit.
Q15: What are the signs a contractor’s working practices might accidentally trigger an inside IR35 status?
A15: It’s easy to slip into an inside IR35 trap. Common red flags include using client equipment, attending staff meetings, or being on a rolling contract with no clear end. A Leeds engineer I advised was deemed inside IR35 because they used the client’s laptop and followed their schedule, despite a contract stating otherwise. To stay outside, ensure you control your work, use your own tools, and avoid employee-like perks. A contract review can spot these risks early.
Q16: How does IR35 impact a contractor with a side hustle, like selling on Etsy?
A16: Side hustles add complexity. If your main contract is inside IR35, PAYE applies, but your Etsy income is separate, taxed via self-assessment as self-employed income. A Bristol crafter I advised earned £30,000 inside IR35 and £10,000 on Etsy; HMRC didn’t combine them, but she needed clear records to avoid an enquiry. Outside IR35, your PSC can offset some side hustle expenses, like materials, if related. Use separate accounts and consult an accountant to keep things clean.
Q17: Can a contractor claim tax relief for training costs if inside IR35?
A17: Inside IR35, you’re taxed like an employee, so training cost relief is limited unless directly required for the contract and approved by the client. A nurse contractor I worked with in Newcastle couldn’t claim a £2,000 course fee inside IR35, as it wasn’t deemed essential. Outside IR35, your PSC can claim training as a business expense, reducing corporation tax. Document the training’s relevance to your work and check HMRC’s allowable expense rules.
Q18: What’s the impact of IR35 on a contractor’s ability to claim childcare costs?
A18: Childcare costs are a sore point. Inside IR35, you can’t claim childcare as a business expense through your PSC, as you’re taxed via PAYE. However, you might qualify for HMRC’s Tax-Free Childcare scheme, like any employee, covering up to £2,000 per child annually. Outside IR35, childcare isn’t typically an allowable PSC expense either, but I’ve seen savvy contractors in London structure their salary to maximise scheme eligibility. Check your eligibility on GOV.UK to avoid missing out.
About the Author
Mr. Maz Zaheer, FCA, AFA, MAAT, MBA, serves as the CEO and Chief Accountant at MTA and Total Tax Accountants, two premier tax advisory firms in the UK. With more than 15 years of practical expertise in UK taxation, Maz excels in guiding individuals, SMEs, and corporations through intricate tax challenges. As a Fellow Chartered Accountant and an accomplished tax author, he is renowned for demystifying complex tax topics in his widely read articles. His expert guidance equips UK taxpayers with the knowledge to manage their fiscal responsibilities effectively and assuredly. https://www.linkedin.com/in/totaltaxaccountants/
Disclaimer
The content in our articles is offered for general informational purposes only and should not be construed as professional advice. Although we aim to ensure the information is current and accurate, MTA provides no guarantees—express or implied—regarding the completeness, precision, reliability, appropriateness, or accessibility of the website, its content, products, services, or associated visuals for any use. Any dependence on this information is undertaken solely at your own risk. Additionally, the graphs presented may not be entirely dependable.
