Should I Take a Contract Inside IR35?

I’m frequently asked this question by self-employed contractors since the IR35 reforms in April last year.

In truth, the only person that can really answer the question is the contractor themself, each and every individual’s circumstances are different. In my view, it’s difficult to make a strong case for working inside IR35 vs permanent roles. However, for the purposes of this article I’ll offer my perspective looking at the options objectively. I’ll also offer a glimmer of hope for those that are considering leaving contracting for permanent roles.

N.B. This article is only relevant if you’ve historically worked as a contractor outside IR35 and, since the April 2021 reforms, have found the majority of your opportunities now falling inside IR35, as companies struggle to get to grips with the change. If, however you’ve built a career working in roles that have always been inside IR45, via PAYE, then you’re unaffected.

I’m going to take a Q&A approach, offering my thoughts to the regular questions asked.

I’ve historically worked outside IR35 for many years, will taking inside IR35 roles invite unwanted attention from HMRC?

No one really knows for sure how the HMRC machine works, but looking at the facts I would say it’s quite possible. I’ve 17 years legal experience in IR35, personally managed over 100 HMRC IR35 enquiries for clients, I’m aware they’ll look for any avenues they can.

They have recently been given an additional £161m compliance funding, given the expense of Covid, they will be tasked with identifying any scope for tax recovery.

HMRC have the legal right to review your contracts going back 6 years, it is possible that moving inside IR35 via PAYE will raise flags as to why historically you’ve been assessed outside IR35. That said, if you were correctly assessed outside IR35 in previous years, there is no reason to feel uncomfortable.

What is the % difference of my net income inside vs outside IR35?

The increase in your take home outside IR35 (vs Inside) could range from 8% to as high as over 30%, dependent on a number of factors, I’ll address them in turn. Let’s take a typical £500/day contractor.

Assuming the gross day rate is the same inside IR35 vs outside IR35 (e.g £500/day) you’ll earn around 8% more outside IR35 (c.£480/month). This is assuming you operate your Ltd company tax efficiently (e.g. low salary, dividends).
If the Employer asks you to go via an Umbrella, absorbing their Employer Taxes (over 15%) within your PAYE day rate, that’ll increase the difference dramatically. This puts the take home advantages of an outside IR35 opportunity at closer to 27%.
The gap gets even wider when you factor in expenses. Commuting is very expensive, if you are inside IR35 it’ll come out of your net pay, if you’re outside IR35 you can offset these costs via your Ltd company as expenses, reducing your tax burden.
Finally, distribution of income. For a large number of contractors working via their ltd company, they’ve distributed their income between each spouse efficiently. This can make a huge difference, but this option is off the table for an inside IR35 contract.

What about a Pension for inside IR35 roles?

This is quite confusing for most, it’s also a little misrepresented. The reality is that employer pensions are not very attractive for contractors working inside IR35. There are two factors to consider:

You won’t receive a workplace pension until you’ve completed 12 weeks at a client. For some contractors, they will likely move between clients and that doesn’t give them much time to earn pension contributions from them.
You may have heard ‘3% workplace pension’ being mentioned. Don’t confuse this with a permanent person likely receiving 3% pension on their entire earnings, in reality a workplace pension has a threshold of ‘qualified earnings’ that limits the 3% client contribution to apply to a maximum of £847 earnings per week. Simply put, if you’re on £500/day, you’ll be earning £2,500 per week, yet your pension is only 3% of £847 (£25.41) payable from 12 weeks onwards with the client.

What other benefits and rights do I get working inside IR35 e.g. Holiday pay, sickness, holidays?

Given you have no employment rights working outside IR35, a fairer assessment is to analyse how an inside IR35 role compares to permanent employment. Inside IR35 roles do not stack up favourably in this space, most permanent employees enjoy enhanced pension, private healthcare, life insurance, significant sick pay, full maternity leave etc whilst is all a distant dream for a contractor working inside IR35.

Holiday pay: is usually a work of fiction, it’s simple a case of a % of your pay being set aside (usually 12.07%) to cover the mandatory 20+8 days you are legally required to take. You are not being paid holiday pay on top.
Sick pay: You’ll only be entitled to statutory sick pay (SSP) at £96.35 per week, claimable after 4 days of being off. Hardly worth it for a highly paid contractor.