Inside Vs. Outside IR35: Understanding The Key Differences For UK Contractors

If you’re a contractor in the UK, you’ve probably heard the term IR35 thrown around.

But what exactly does it mean for you, and why is it important to understand whether you’re inside or outside IR35?

Understanding the key differences between inside IR35 and outside IR35 can be the key to managing your tax liabilities effectively. With the right advice and a clear strategy, you can maximise your take-home pay, avoid costly mistakes, and ensure your tax situation is handled smoothly.

The good news?

You don’t have to figure it all out alone. Whether you’re a contractor or employee, Bells Accountants are here to simplify the process. Our team of friendly experts can guide you through the complexities of IR35 status determination, tax planning, and compliance, ensuring you’re always on the right track.

Call 020 8468 1087 today!

What Is IR35?

Before exploring the specifics of inside vs. outside IR35, let’s quickly clarify what IR35 is.

Introduced by HMRC in 2000, IR35 is tax legislation aimed at identifying individuals who are, in effect, working as employees, even though they are technically self-employed contractors. Essentially, it’s designed to crack down on ”disguised employment” — when contractors operate like employees but avoid paying the same tax and National Insurance contributions.

The goal of IR35 is to ensure that contractors who work like employees but without the benefits or rights that employees receive pay the correct amount of tax.

So, whether you’re inside IR35 or outside IR35 makes all the difference.

To learn more, you can take a look at the Gov.uk website.

What Is Inside And Outside IR35?

Let’s get to the matter: inside IR35 vs. outside IR35.

• Inside IR35 means you are, for tax purposes, considered an employee of the client you’re working for. So, even though you are working through your own limited company, you’ll be taxed as if you were an employee. This means PAYE (Pay As You Earn) will apply, and you’ll have to pay income tax and National Insurance contributions, just like an employee would.
• Outside IR35, on the other hand, means you’re truly operating as a contractor and are not considered an employee of your client. This gives you more flexibility and benefits from tax efficiencies, like paying yourself through dividends from your limited company, which can reduce your overall tax burden.

In short, inside IR35 vs outside IR35 comes down to whether your work arrangement resembles that of an employee or an actual contractor.

Let’s look at the key differences in more detail.

A Comparison: Inside IR35 And Outside IR35

Here’s a quick comparison of inside IR35 vs outside IR35:

Outside IR35 offers a more favourable tax situation for contractors, as it allows for greater flexibility and tax savings.

Explore detailed tax management strategies tailored for your small or medium-sized business.

How To Determine IR35 Status

One of the contractors’ biggest questions is: How do we determine IR35 status?

Understanding your IR35 status is essential, as it can impact your finances. Here are the key factors that are considered when determining if you’re inside or outside IR35:

1. Control – If your client controls how, when, and where you work, it’s a sign you may be inside IR35. Contractors outside IR35 have more control over their working arrangements.
2. Substitution – If you’re allowed to send someone else in your place to do the work, you’re more likely to be outside IR35. If you’re personally expected to do the work, you’re likely inside IR35.
3. Mutuality of obligation – This refers to whether there’s an expectation that your client will offer you continuous work and that you will accept it. You’re more likely to be inside IR35 if there’s a mutual expectation.
4. Exclusivity – If you work exclusively for one client, the likelihood of being inside IR35 increases. Contractors working with multiple clients are generally considered outside IR35.

An IR35 assessment can be tricky to navigate, but tools like the inside vs outside IR35 calculator can help give you a clearer picture. Remember that these tools are not always definitive but can guide your likely status.

Inside IR35 Contractor Rules

If you find yourself inside IR35, there are a few essential things to remember. Firstly, you’ll need to pay income tax and National Insurance contributions just like an employee. However, you can still take advantage of certain tax-deductible expenses, such as travel and equipment costs, though your overall tax relief options are more limited than outside IR35 contractors.

Moreover, working inside IR35 can reduce your take-home pay, so you must be aware of your IR35 compliance and ensure your client has determined your status correctly.

IR35 Compliance And Legislation

Ensuring IR35 compliance is key for contractors. You could be liable for back taxes and penalties if caught inside the IR35 net but working like an actual contractor. Ensuring your contract and working practices are clear and in line with the IR35 rules is essential.

Changes to the IR35 legislation came into effect in April 2021, shifting the responsibility for determining a contractor’s IR35 status from the contractor to the client in the private sector. This change means that clients (rather than contractors) must now assess whether the contractor is inside IR35 or outside IR35.

How Does It Impact UK Contractors?

So, why does it matter if you’re inside IR35 or outside IR35?

Your tax status can significantly affect how much you take home and pay in taxes. If you’re inside IR35, you’ll be subject to the same tax deductions as employees, which could impact your overall earnings. On the other hand, if you’re outside IR35, you can operate more like a business, benefiting from tax efficiencies like dividends and business expenses.

Understanding your IR35 employment status is crucial not only for your finances but also for your peace of mind. With the right advice and an accurate IR35 assessment, you can avoid costly mistakes and remain on the right side of the law.

As a contractor in the UK, you must use an IR35 calculator to assess the influence of original IR35 legislation on your net income.

Need Help? Get In Touch With Bells Accountants!

At Bells Accountants, we understand the challenges of navigating inside IR35 and outside IR35 statuses. Whether you’re an employee inside IR35 or a contractor working outside IR35, managing your taxes can feel complex and overwhelming. That’s where we come in.

Our team of expert accountants can help you ensure tax compliance while maximising your savings, offering tailored advice for both IR35 contractors and employees.

Beyond IR35-related support, we also offer a wide range of accounting services, including bookkeeping & financial reports, tax planning & compliance, payroll management, etc.

Get in touch with us today at to book a chat, or contact us here.

Let us take the stress out of managing your taxes!