The IR35 legislation is a UK tax law designed to prevent “disguised employment” by contractors who operate as employees but are taxed as self-employed individuals. In April 2021, new changes to IR35 came into force, shifting the responsibility for determining employment status to the end client or agency they work through. In this blog post, we’ll explore the impact of these changes on UK contractors.
The Changes to IR35 in 2021
The new IR35 rules place the responsibility of determining a contractor’s employment status on the end client or agency they work through. This means that clients must assess whether a contractor should be treated as an employee for tax purposes. If so, they must deduct income tax and National Insurance contributions at source.
The Impact of the Changes on Contractors
The new IR35 rules have had a significant impact on contractors, particularly those who work through their own limited companies. Contractors who are deemed to be “inside IR35” will have their income taxed as if they were an employee, but they will not receive any employment benefits such as sick pay, holiday pay, or pension contributions. This could result in a significant drop in take-home pay for some contractors.
Loss of Income for Contractors
One of the most significant concerns for contractors is the potential loss of income. Under the new rules, contractors who are deemed to be “inside IR35” could face a substantial reduction in take-home pay. This is because they will be taxed as if they were an employee but will not receive any of the associated employment benefits.
Backdated Tax and National Insurance Contributions
Contractors who are found to be inside IR35 may also be required to pay backdated tax and National Insurance contributions, which could run into thousands of pounds. The new rules apply to contracts that were in place on or after 6th April 2021, meaning that contractors who were previously operating outside IR35 could find themselves being retrospectively taxed as if they were inside IR35.
The Wider Economic Impact
Some experts have warned that changes to IR35 could lead to a reduction in the number of contractors available for work. This could have a knock-on effect on businesses that rely on the flexibility and expertise of contractors, particularly in sectors such as IT and engineering.
The Future of the UK’s Flexible Workforce
The new IR35 rules have had a significant impact on UK contractors, with many facing uncertainty about their future in the industry. As the situation continues to evolve, it remains to be seen what the long-term effects of the changes will be on the UK’s flexible workforce. The government had announced a review of the new rules in 2022, and although they were put on hold, there may be further changes on the horizon.