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  4. What are the financial implications of being inside IR35?
  1. Home
  2. IR35 FAQ's
  3. What are the financial implications of being inside IR35?

What are the financial implications of being inside IR35?

Being inside IR35 impacts the way you are taxed, since HMRC will deem that you should follow PAYE rules not limited company rules. You may therefore find your after tax earnings are lower in comparison.

If you are a contractor and your end hirer decides that you fall inside IR35, then you will receive your payments from them into your PSC in the form of a ‘deemed payment’. This means that the fee payer (usually a recruitment agency but sometimes an end hirer) will deduct your income tax and national insurance directly from these payments through their own payroll system, before they reach your bank account. Alternatively you can be taxed on a PAYE basis via an umbrella solution. 

Being taxed on a PAYE basis isn’t as tax efficient as taking a small salary and dividends from your company, so you will pay more tax – whether you do it through your own limited company or through an umbrella company. However, the real impact on your finances depends on your personal circumstances.

If you are working via your limited company on a captured assignment inside IR35, the fee payer will deduct your National Insurance contributions and income tax before making the payment into your company bank account. You can then withdraw the payment as a dividend – without worrying about any more tax implications.

If you are registered for VAT, you will continue to receive the VAT element of your invoice which you will pay directly over to HMRC. Whilst your tax will be taken care of, you still need to make sure there are funds in the company account to cover running costs such as accountancy fees and insurance.

Updated on 18th February 2020

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