IR35 changes have come into force, resulting in some self-employed workers having their tax status changed as of April 2021.
The private sector reform was due to take place in April last year, but got pushed back because of Covid-19 and will affect both contractors and the companies which hire them, shifting the emphasis of determination and liability from the contractor to the client.
IR35 will target and clamp down on contractors who essentially operate in a similar way to employees, but work through limited companies for tax purposes.
How the IR35 changes work
The rules change throughout the private sector on April 6, having been introduced across the public sector in 2017.
IR35 refers to the off-payroll working rules which aim to ensure that both contractors and the companies they are carrying out work for are paying the correct level of National Insurance and personal tax contributions.
Under the reforms, medium and large private businesses will be responsible for ascertaining whether their contractors fall inside or outside the scope of IR35, rather than the workers themselves.
If a medium or large-sized private sector client requires the services of a contractor they should provide an employment status determination, as well as the reasons behind it. Contractors will be able to dispute the determination if they disagree with it.
There is no change to the rules when it comes to contractors providing services to small private sector businesses.
The changes are a way for the Treasury to ensure they receive the correct National Insurance and personal tax contributions.
Employees of a company must pay 12% National Insurance on earnings between £9,500 and £50,000 and two per cent on earnings above this, with employers also contributing 13.8% in payments above the £9,500 threshold for each employee on their payroll.
However, self-employed contractors pay class two NICs of £3.05 a week on earnings between £6,475 and £9,500, class four contributions of 9% up to £50,000, and 2% on anything over this. Employers also do not have to pay contributions for self-employed workers.
Additionally, self-employed Contractors often pay themselves a minimum wage and take the remaining income as dividends.
Both of these equate to a lower tax bill than if they were employees and ultimately lower revenue for HMRC.
If you would like to know anything else about the IR35 2021 reforms, please get in touch with the MERJE team: firstname.lastname@example.org.