IR35 Basics: Inside vs Outside Explained

IR35 (Off-Payroll Working) is the tax monster under the bed for UK contractors. It is designed to stop "disguised employment"—where a worker acts like an employee but operates through a Limited Company to save tax.

Inside vs Outside: The Difference

Outside IR35 (The Goal)

You are a genuine business.

• Tax: You pay Corporation Tax, Salary, and Dividends.
• Efficiency: You control your tax rate (approx 19-25%).
• Risk: You take financial risk (e.g., fixing mistakes at your own cost).
• Control: You decide how/when/where the work is done.
• Substitution: You can send someone else to do the work.

Inside IR35 (Deemed Employee)

HMRC views you as an employee in all but name.

• Tax: The fee payer (client/agency) deducts PAYE & NICs before paying your company.
• Efficiency: Zero. You are taxed like an employee (up to 45% + NICs) but get no employment rights (no holiday pay, no pension).
• Impact: Our Dividend Calculator becomes irrelevant because you cannot pay dividends from this income.

Who Decides?

• Small Clients: You (the contractor) decide your status.
• Medium/Large Clients: The Client decides your status (and is liable if they get it wrong).

This shift (April 2021) caused many banks to issue "Blanket Bans" on LTD contractors.

Key Tests for Status

1. Right of Substitution (RoS): Can you send a substitute? (Ideally, have you actually done it?)
2. Control: Does the client tell you how to do the job, or just what they need delivered?
3. Mutuality of Obligation (MOO): Are they obliged to offer work? Are you obliged to take it? (Employees have MOO; Contractors shouldn't).

Strategy for Inside IR35 Contracts

If you are forced "Inside":

1. Pension: Use "Salary Sacrifice". Ask the umbrella/agency to pay directly into your SIPP. This saves the Income Tax and NICs legally.
2. Shut Down? If all your work is Inside IR35, consider closing the LTD (via MVL) and using an Umbrella Company instead to save accountancy fees.

Disclaimer: IR35 status relies on contract wording AND working practices. Get a professional contract review (e.g., Qdos/Kingsbridge).