IR35 and Limited Company Contractors

If IR35 applies, what taxes do contractors have to pay?

In the event that a contractor is deemed to be "Inside IR35", their limited company is only responsible for paying taxes if the original Intermediaries Legislation applies. Under the new off-payroll rules, contractors are not liable for any taxes.

The Intermediaries Legislation was originally applicable to all engagements before April 2017. After that date, the old rules continued to apply to all private sector engagements, but as of April 2021, they only apply to private sector engagements where the client is classified as small.

More detail

When a contractor is "Inside IR35", their limited company is only liable for taxes if the original Intermediaries Legislation applies. If the contractor's engagement is considered employment and the original rules apply, their limited company may have to pay additional taxes like income tax and National Insurance contributions. Contractors aren't responsible for any taxes under the new off-payroll rules. The Intermediaries Legislation previously applied to all engagements prior to April 2017, then continued to apply to all private sector engagements, and now only applies to private sector engagements where the client is small.

It's crucial to assess the contractor's employment status to determine whether the original Intermediaries Legislation applies and if any extra taxes are owed.

Income Tax: calculated on their taxable income taken as salary and dividends.

Employee National Insurance Contributions (NICs): payable on the deemed payment earnings above the weekly Lower Earnings Limit (LEL) and up to the Upper Earnings Limit (UEL).

Employer National Insurance Contributions (NICs): also payable on the deemed payment earnings.

Notably, under the old rules, the contractors' company is liable for employers' National Insurance Contributions, a tax usually payable by firms on top of the salary they pay to contractors. The final tax bill will consider any already paid tax so that tax isn't paid twice.

Contractors should seek professional advice if they are unsure about their tax liabilities.

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