The application of IR35 was extended in April 2021, making the IR35 calculator even more important to small and medium sized enterprises (SMEs) in the private sector. In this article we explain the IR35 calculator and how it can be helpful for your business.
IR35 refers to legislation which requires independent contractors (aka “off-patrol workers”) to, in certain conditions, pay income tax and National Insurance contributions as if they were employees. It is designed to test whether a contractor is truly a contractor or a disguised (aka “deemed”) employee because people who are self-employed get to pay tax more efficiently than people who are employed by others i.e. the impact of IR35 can reduce a contractor’s net income by up to 25%.
You first need to check your employment status from the perspective of the tax revenue authorities (HMRC). The government offers the Check Employment Status for Tax (CEST) tool which can be found here. There are two main possible outcomes: a contractor can be found to be either “inside IR35” or “outside IR35”.
This means that HMRC sees the contractor as an employee. Income tax and National Insurance contributions will need to be paid under the Income Tax (Earnings and Pensions) Act 2003 and the Social Security Contributions (Intermediaries) Regulations 2000, respectively.
This means that HMRC sees the contractor as being self-employed. According to them, even if there was no intermediary, the contractor would still not be an employee. The contractor can claim self-employment on their tax returns, and enjoy the tax efficiency associated with it. However, the contractor will not have the legal protection offered to employees e.g. sick pay or minimum notice period before termination.
The IR35 calculator is a means of assessing the impact of IR35 on a contractor's net income/take home pay, if they fall inside IR35. The calculator will ask you to input details such as the contractors hourly or weekly rate, the number of hours they work in a day or week, the number of weeks worked in a year, the value of expenses, the amount paid into pensions etc.
The aim of the IR35 calculator is to determine how much tax will have to be paid and how much a contractor’s income will vary if they are inside 1R35. There are even options to see how the impact of IR35 will change depending on the intermediary used i.e. if the contractor is not working through a limited company (aka personal service company), then they will likely be using a partnership, umbrella company or an individual as their intermediary.
A contractor’s intermediary has the responsibility to calculate the contractor's “deemed payment” i.e. the tax and National Insurance contributions which have to be paid. This can be done using the following tool or manually using the following government guidance.
Further, following the introduction of the Off-payroll tax scheme in 2017, be careful to only use an IR35 calculator if the client hiring the contractor (i) is in the private sector, and (ii) meets the criteria for a “small company” under Companies Act 2006.
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The opinions on this page are for general information purposes only and do not constitute legal advice on which you should rely.