How to use the Outside IR35 calculator

There are two ways to use the calculator:

What do ‘Your Results’ mean?

This section explains the key figures shown in your calculation. Each term provides a different perspective on your earnings and helps you better understand your overall financial position.

What is IR35?

IR35 is an employment status test determining whether a contract points towards employment or self-employment. It combats tax avoidance by closing loopholes, ensuring contractors working the same way as permanent employees pay the same taxes.

If your contract is 'inside IR35', it points towards employment. Your working arrangements are similar to those of a permanent employee, so HMRC imposes broadly the same income tax and national insurance liabilities

How does IR35 work?

IR35 applies on a contract-by-contract basis. For each contract, the relevant 'decision-maker' (usually the end client) prepares a Status Determination Assessment ('SDS'). The SDS looks at the engagement contract's wording and the contractor's day-to-day working practices and decides whether IR35 applies.

HMRC offer detailed guidance notes and an online tool to help decision-makers determine whether IR35 is relevant. Third parties also specialise in performing these assessments and providing insurance against a potentially incorrect determination.

Who does IR35 apply to?

Any contractor that is a UK resident for tax purposes has the potential to be impacted by IR35. Although the party responsible for performing the SDS can vary, if you are a contractor paying tax in the UK, you need to consider IR35.

What is a limited company?

A limited company is a type of business with a distinct legal identity, separate from those who own it (the shareholders) and those appointed to manage it (the directors). It is a business structure that limits the liability the company’s owners are exposed to.

In the event the limited company faces financial hardship, the shareholders’ personal assets are not at risk beyond their investment in the business. This is different to a sole trader or general partnership, both types of unincorporated businesses without legal distinction between the owners and the business itself.

As a limited company is a distinct legal entity, it can enter contracts in its own name, employ staff, sue and be sued, and is responsible for its debts and liabilities.

What is a ‘personal services company’?

A personal services company (‘PSC’) is simply another name for a private limited company set up by a contractor to provide their services to clients. They’re most often used in Outside IR35 arrangements, with the company acting as an intermediary between contractor and client.

In most situations, the company is owned 100% by the contractor; they are the sole shareholder and director.

When is a limited company right for me?

In general, a limited company is right for you if:

• Your contract is Outside IR35, and
• You intend on contracting for the long term.

If either of these criteria isn’t met, you may want to consider working through an umbrella company.

Why contractors don’t work as sole traders

Contractors rarely work as sole traders as they usually don't have a choice; most agencies and clients will refuse to engage them. They will stipulate that they require a company (limited or umbrella) to act as an intermediary in the chain of services.

Similar to IR35, if a client hires a sole trader as a contractor and is subsequently subject to an HMRC investigation over their employment status, they are liable for any additional income tax, National Insurance contributions, penalties, or fines. Most are unwilling to take on this risk.

As no intermediary (limited company etc) separates the contractor from the client, a contractor is one step closer to the employer. Therefore, there is a greater risk that an individual trading as a sole trader could look to claim employment rights from the client, a common occurrence in sectors such as construction.

In addition to the above, operating as a sole trader has downsides for the contractors themselves. For a sole trader, there is no distinction between business and individual. You hold personal responsibility for the businesses' debts and may have to sell off personal assets to meet those debts should something go wrong.

Should I contribute to my pension personally or through my limited company?

As a limited company contractor, you can pay into your SIPP from your after-tax earnings or directly from the company. If you make payments from your after-tax earnings, you get automatic tax relief at the basic rate of 20%; then you claim back the higher rate (40%) or additional rate (45%) relief via your self-assessment tax return.

If you make payments directly from your limited company, the contributions count as allowable business expenses, reducing the corporation tax you pay. You will also save on Employer’s National Insurance (something you can’t claim back if paying out of after-tax income) and income tax owed on the extra salary/dividend not taken.

An additional restriction comes with paying into your pension from after-tax earnings. You are restricted to contributing up to 100% of your annual salary into your pension, with dividends not counting to the limit. If you are a limited company contractor paying yourself mainly dividends and taking a small salary of £9,100, the most you can contribute from your after-tax earnings is £9,100.

You could always increase your salary to increase the limit, but this isn’t necessarily tax-efficient. This salary threshold doesn’t apply to limited company contributions, meaning you can keep taking the £9,100 salary and contribute the total £60,000 into your pension.

Can I contribute to my SIPP via my limited company?

Yes, you can contribute to your SIPP via your limited company. Contributing to your SIPP is an excellent way of saving for retirement and a tax-efficient way of using your business's profits. The company's contributions to your pension are allowable expenses, meaning you reduce your taxable profits and, therefore, your corporation tax liability.

Another benefit of making employer pension contributions via your limited company is that employer pension contributions are not subject to National Insurance.

Directors Salaries

As a director, you have four options:

Corporation Tax

Corporation Tax is the tax that limited companies pay on their profits after allowable expenses. You must register within three months of starting to trade, using your Government Gateway account to inform HMRC of your trading start date and accounting period. Profits under £50,000 are taxed at 19%, those over £250,000 at 25%, and profits in between qualify for marginal relief. You must complete a company tax return (CT600) even if no tax is due, submitting it within 12 months of your accounting period end. Tax payment is due nine months and one day after the end of that period. The Corporation Tax year runs from April to March, and profits spanning two tax years must be apportioned. Penalties apply for late registration, but losses can be carried forward to offset against future profits.

Value Added Tax (VAT)

VAT is a consumption tax collected by businesses on behalf of HMRC, applied at each stage of the supply chain but ultimately paid by the consumer. The UK has three main rates—20% standard, 5% reduced, and 0% zero-rated—with some items exempt or outside the scope of VAT. You must register if your taxable turnover exceeds £90,000 in a 12-month period or will do so within 30 days. Once registered, you must charge VAT, issue VAT invoices, and file regular VAT returns. Businesses can choose between the Standard Scheme, which allows VAT reclaims, or the Flat Rate Scheme, designed for smaller companies. VAT returns are typically submitted quarterly, with payment due within one month and seven days after the period ends. All VAT-registered businesses must comply with Making Tax Digital and maintain digital records.

PAYE

PAYE (Pay As You Earn) is HMRC’s system for collecting Income Tax and National Insurance directly from employee salaries. Employers must register with HMRC before running payroll and use software to calculate deductions and submit Real Time Information. PAYE covers Income Tax, Employee and Employer National Insurance, student loan repayments, and, for larger employers, the Apprenticeship Levy. Income Tax and NICs are calculated based on thresholds and tax bands, with employer NICs paid at a flat 13.8% on earnings above £9,100 per year. Employers must submit a Full Payment Submission each payday and pay HMRC monthly, usually by the 22nd of the following month. End-of-year filings include P60s for employees and P11Ds for reporting benefits. Smaller employers can apply to pay quarterly or operate an annual PAYE scheme for directors. Most contractors choose to have their accountant manage PAYE to ensure compliance.

Self-Assessment

Self-Assessment is HMRC’s method of collecting tax on income not taxed at source, such as dividends from limited companies. Directors and contractors who pay themselves dividends must register for Self-Assessment and file an annual return. The system requires you to report your total income, including dividends, salary, and any other taxable income, as well as declare allowable expenses and reliefs. The online return calculates how much tax and National Insurance are owed after deducting any tax already paid through PAYE. Self-Assessment returns are due by 31 January following the end of the tax year, with tax payments typically made twice yearly. Late filings or payments result in automatic penalties and interest charges. Many contractors choose to have an accountant manage their Self-Assessment to ensure all income and deductions are correctly reported.

Business Asset Disposal Relief

Business Asset Disposal Relief (BADR) is a capital gains tax relief available to eligible individuals when they dispose of (close, sell etc) their business. It reduces the capital gains tax rate on disposals of certain business assets from 20% to 14%. To qualify for BADR:

• The business must have been a trading company for at least two years leading up to the date of disposal;
• When the disposal takes place, you must own at least 5% of the company and have at least 5% of the voting rights; and
• You must have been an employee/director of the company for at least two years leading up to the disposal.

You can claim BADR through your self-assessment tax return or by filling in Section A of the Business Asset Disposal Relief helpsheet. It must be claimed by the second 31 January following the end of the tax year in which the qualifying gain arose.