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IR35 changes: What the new rules mean from April 2021

The private sector reform was due to take place in April 2020, but was delayed because of the Covid-19 pandemic.


Key points


  • IR35 refers to the off-payroll working rules that aim to ensure that both contractors and the company they are working for are paying the correct level of National Insurance contributions (NICs).

  • The private sector reform was due to take place in April 2020, but was delayed because of the Covid-19 pandemic.

  • IR35 changes will affect both contractors and the companies that hire self-employed workers.

Some self-employed workers will have to start paying tax differently from 6 April 2021, as IR35 changes come into force.


The private sector reform was due to take place in April last year, but was delayed because of the Covid-19 pandemic.


The move will affect both contractors and the companies that hire them.


It is designed to clamp down on contractors who essentially operate in a similar way to employees, but work through limited companies for tax purposes.


How will the IR35 changes work?


The rules are due to change for the private sector on 6 April 2021. They were introduced in the public sector in 2017.


IR35 refers to the off-payroll working rules that aim to ensure that both contractors and the companies they are working for are paying the correct level of National Insurance Contributions (NICs).


Under the reforms, medium and large private businesses will become responsible for judging whether their contractors fall inside or outside the scope of IR35, rather than the workers themselves.


If a contractor provides services to a medium or large sized private sector client, they: -

  • Should get an employment status determination from the client, as well as the reasons behind that determination;

  • Will be able to dispute the determination given to them should they disagree with it.

There is no change to the rules for contractors providing services to small businesses in the private sector.


The changes are a way for the Treasury to make more money through National Insurance Contributions.


Employees of a company must pay 12% National Insurance on earnings between £9,500 and £50,000, and 2% on earnings above £50,000. Employers also contribute 13.8% in payments above £8,840 for each employee on their payroll.


Will the changes affect me?


The Government has said this will not affect people who work as genuine freelancers.


Instead, it is targeted largely at contractors who set up a Personal Service Company (PSC). and use that for their business.


Some contractors will have their clients hire and pay their PSC, which in turn pays the contractor. And these PSC's will remunerate their staff (directors) by paying a minimal salary and dividends in order to mitigate paying NICs all together.


HMRC believes a portion of these contractors should be regarded as employees, and therefore be paying the same amount of tax.


Individuals who are working through a limited company


IR35 is not a consideration for sole traders. If you are self-employed and working through your own limited company for numerous clients on multiple different projects then it will be very unlikely that you will be affected by IR35 either.


However, those who are individuals who are working through a limited company for just one client, in a role that has the same level of risk, responsibility, control, substitution and obligation as a permanent employee could be inside IR35.


If you find yourself in this situation, then you will have to pay full tax and national insurance contributions, instead of receiving your salary and dividends from your company profits. You will also not be able to claim the same amount of expenses.


This is because you are not deemed by HM Revenue and Customs as taking the financial risks or having the same level of company control as limited company directors, and therefore you are not entitled to the same benefits.

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