Are you inside or outside IR35?

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IR35 Explained

Churchill Knight & Associates Ltd is proud to be knowledgeable as a contractor accountant expert. Our in-depth knowledge of the contractor industry means we can help you find the best payroll service for you and help you maximise your take home pay. 

For most contractors, a limited company is the most tax efficient way to legally maximise your pay. However, as a contractor you could be affected by IR35, the tax legislation which determines your tax status. 

HM Revenue & Customs (HMRC) defines this tax status as 'inside' or 'outside' IR35. Put simply this means:

1. Inside IR35 defines you as 'temporary employed'

2. Outside IR35 defines you as 'self-employed'

HMRC introduced this legislation in a bid to tackle disguised employment whereby contractors can benefit from the tax advantages of being self-employed, but in reality they may have the same working relationship as a standard employee, with the same benefits and security as normal employees. 

If this is the case, and you are inside IR35, we can still help you maximise your pay.

Why was IR35 introduced?

HMRC deemed that too many employees were avoiding paying their tax and NI each month at source by working under the guise of a contractor and receiving payments outside IR35 salary and dividends. IR35 was introduced to tackle this perceived avoidance through the use of intermediaries (i.e. a limited company), such as partnerships or personal service companies.

Contractors often use a limited company as a personal service company to obtain work, either directly from a client or via a recruitment agency. HMRC maintained that if the personal service company was removed, the contractor would in fact be a 'disguised employee' and thus eligible for tax and NI contributions each month. IR35 was used to try and tighten this particular tax avoidance loophole.

HMRC can start an IR35 enquiry into a contractor's engagements at any time. They will scrutinise the written contract(s) and true facts of the engagement. If they discover that the contractor is 'caught' by IR35, they will demand all backdated tax and NI, plus interest and penalties, if the contractors were paying themselves outside the IR35.

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How does it affect you?

  • Outside IR35
    When a contractor is receiving payments outside IR35, they can decide the level of salary to pay themselves and claim back any legitimate business expenses. If you choose to pay yourself outside IR35 you will be paying tax as if you are self-employed. Anything left within the business account will be profit to which Corporation Tax should be paid (but not National Insurance) which can then be distributed to the shareholder(s) as a dividend payment. This way of working returns a significant increase in a contractor's take home pay over working inside IR35.
  • Inside IR35
    If you choose to pay yourself inside IR35 you will be paying tax as if you are a temporary employee. When a contractor is receiving payments inside IR35, some basic personal expenses could be claimed however the rest of the income will be treated as salary, which includes employers NI. This way of working returns a significant decrease in a contractor's take home pay over working outside IR35.

If you are unsure about your tax status, request a call back from one of our experts and we can help talk you through your options. 

We offer bespoke, tailored accountancy services; we always consider your own requirements and circumstances in order to provide you with the highest take home pay legally available. Churchill Knight was established in 1998 and has been engaged by several thousand freelancers and contractors during that time. Our experience will enable you to find the most suitable business set-up. All you need to do is tell us what your circumstances are and what you're looking to achieve.

For more information, give our specialist consultants a call on  01707 871 610 or email enquiry@churchill-knight.co.uk . Alternatively you can either request a call back or a calculation below. 

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