Whether you are inside or outside of IR35 makes a huge financial difference to contractors.
Where IR35 applies, the individual broadly faces the employed levels of tax and NIC being paid.
Those inside IR35 have the benefit of a 5% flat rate deduction on the gross fees they received before having to account for tax and NIC.
Based on income of £25,000 (with no expenses and salary at the personal allowance) for 2011/2012 those inside IR35 would take home £18,150. Those outside IR35 would take home £21,438.
On £75,000 those inside IR35 take home £45,681 and those outside IR35 £55,815.
Higher Contractor Rates
Generally, the higher paid contractor population commands much higher rates than their permanent equivalents. Contractors accept this as part of the trade-off with employment rights.
If they were to pay themselves a weekly salary between £97 and £110 (the primary threshold) they will qualify for contributory benefits. They do not make any NICs.
Financial Difference – Tax Liability Can be Reduced
For those that take a higher salary, tax liability can be reduced by claiming for the cost of travel to work. That’s something that is not available to employees.
There is a massive financial difference to contractors depending if they are inside iR35 or outside it.
Contractors who are currently outside IR35 need to take action now to make sure they stay outside it well before April 2020 comes along.
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