Work In Contracting, IR35 Changes That Are Supposed To Be Noted
There exists a lot of rules and regulations that govern the taxation of income obtained by people around the world. In addition to there being so many rules, each country has its own version of these rules and it is difficult for a person to keep track of all the changes in these rules. So applying them when doing their own taxes can be somewhat a big task. Having private auditors or tax calculators do it for them is a good option that is to be considered especially for contracting, IR35 can be a hassle to deal with.
What is IR35?
IR35 is a tax legislation that is aimed at preventing the avoidance of tax by people who provide services to the clients through an intermediate company or limited company. As the people providing their service are contract workers who actually would be employees for a different company in case of non-existence of the intermediate company, this legislation under Her Majesty’s revenue and customs (HMRC) prevents the evasion of tax by such individuals. So for anybody working in the UK under some form of contracting, IR35 changed the way their taxes were done greatly. It is not for all contractors and only those who do not fall under the self-employment category are taxed under this legislation.
How did IR35 change the way taxes were done for Contractors?
The changes do not affect all kinds of contracting, IR35 only brings about changes in the way of doing taxes for contractors who work under an intermediate company or an umbrella company and avoid payment of PAYE tax and deductions towards national insurance. It does not affect independent contractors who are considered self-employed and regarded as a sole proprietor for the sake of tax calculation. For contractors, the difference in payment received after deduction of the taxes when inside and outside IR35 is very significant. The difference is due to the requirement to pay a higher income tax, national insurance and PAYE tax which people outside the legislation can avoid. So in general, for contracting IR35 becomes a problem as looking into the contract on whether it comes inside or outside the legislation becomes necessary.
How it affects independent contractors?
IR35 is aimed at prevention of tax evaders who work under an intermediate company and do not pay the national insurance commission and the tax for their income. As for independent contracting, IR35 does not have any effect as the contractor is supposed to pay a different tax called the self-employment tax which includes the income tax for the state and the federal government in addition to the social security tax and medical insurance.
There are so many rules that regulate the payment of tax for individuals and these rules vary from country to country and also state to state. These rules and regulations also keep changing every now and then, so it is difficult for an individual to always do their taxes on their own. Getting help from a private auditor or tax calculator is a good solution to the problem.