Tax Tips For Contractors – What should I do if my contract is caught within IR 35?

We often get asked about the best way to extract money from a limited company if contract is caught by IR 35.

First and foremost the only way to be sure whether your contract falls inside or outside IR35 is to have it review by professional accountant firm who are specialised in Contractor Accountancy services. (Note - @ APJ Accountancy we offer this free within our standard package service)

And by the way, It works on a contract by contract basis. So for one contract you may fall under IR35 but for some other’s you may be outside.

Be aware that every contract needs to be evaluated on its own merits and every contract can be different.

If you aren’t sure you can take the 10 minute Contractor IR35 Test to see if you are likely to be working under IR35 from HMRC website yourself.

Going back to the question about what is the best method to pay your self. In simple terms

For Income from all contracts that fall outside scope of IR 35 – you can pay yourself combination of small salary and big dividend to maximise your tax savings.

For income related to contracts that fall inside scope of IR 35 –

You may need to pay some additional PAYE and National Insurance on the taxable income from these contracts at the end of the financial year.

So your company will continue you pay you as usual throughout the year deducting PAYE and NICs as applicable.

At the end of the tax year you will need to check that you have paid the right amount of tax and NI by calculating the deemed employment payment due on the IR35 contract(s) undertaken.

If you don’t know much about deemed payment then a step-by-step guide for how to calculate ‘deemed salary’ and related NICs can be found on the HMRC website.

HMRC also have a IR35 ‘deemed salary’ calculation spreadsheet which can be downloaded.

Paste www.hmrc.gov.uk/ir35/ir35.xlt into your browser to download the spreadsheet.

Alternatively, contact us to discuss how we can be of help in calculating your IR35 contract(s) ‘deemed salary’ and NIC liabilities.

Visit www.apjaccountancy.com/contractor-accountant.html

Finally if you are wondering if I need to pay myself the deemed salary? Or Can I only take dividends, do they count? Then answer is:

You don’t need to actually pay yourself the salary, although it is a deductible expense for Corporation Tax purposes so it works out well when you have combination of contracts falling inside and some falling outside IR 35.

If you had paid yourself the salary during the year of the IR35 contract then the ‘deemed salary’ would have been less. You can’t retrospectively pay yourself the salary without incurring more tax.

You can, however, pay dividends and offset the ‘deemed salary’ against these. This claim will reduce the amount of reportable dividends for tax purposes.

I hope this helps. All the best

APJ Accountancy

www.apjaccountancy.com