Tax Implications of IR35 for Limited Companies
Go Limited - April - Tax Implications of IR35 for Limited Companies
If you're a contractor and you're thinking about setting up your own limited company, there's a few things to familiarise yourself with first, one of which is IR35. IR35 is a tax rule that has a direct impact on your income, how you pay tax and whether or not running a limited company is the most efficient way for you to operate your business.
At
Go Limited, we know that IR35 can complicate things for limited company contractors, but that doesn't mean you should take setting up a limited company off the table altogether. If your contracts fall outside IR35, the tax implications could be in your favour.
Inside IR35 vs. Outside IR35: The Difference for Limited Company Contractors
If you've been paying attention to the way contracting has changed over the years, you will know that IR35 legislation has played a big part. Set out by HMRC, IR35 legislation is designed to determine whether a contractor is genuinely self-employed, or if they are actually working as an employee, but calling themselves a contractor. As a contractor who is genuinely self-employed, you gain access to a whole host of benefits, many of which are linked to tax-efficiency and increased take-home pay. For example, taking your earnings as a combination of salary and dividends, or claiming allowable expenses to reduce your taxable profit.
But,if your contract falls inside IR35, HMRC considers you to be an employee and therefore unable to access these benefits. They see you as being an employee, and therefore expect you to pay tax and National Insurance (NICs) like one. This means that your take-home pay is reduced and you bear the costs of running your limited company, without any financial benefits to balance things out.
Contracting Inside vs. Outside IR35
If your contract falls inside IR35, it means HMRC considers you an employee for tax purposes. This means you must pay full income tax and NICs, just like a regular employee, and you can't take advantage of dividend payments or make your approach to tax more efficient. This also means your take-home pay is reduced and you have to cover costs of running your business , but without the paid holiday, sick pay and pension benefits that employees get.
If your contract is outside IR35, HMRC sees you as being a genuine business. This means you can pay yourself through a combination of salary and dividends, and you have the flexibility to claim a wide range of business expenses. You also have greater control over your income.
How IR35 Impacts Limited Company Tax Planning
When it comes to limited company tax planning, IR35 needs to be factored in. IR35 can change how you plan your taxes as a limited company contractor, especially when it comes to your dividend and salary strategy. Outside IR35, you can reduce your income tax by paying yourself a small salary and topping up your earnings with dividends, which are taxed at a lower rate. This helps to keep your tax liabilities low, keeping more money in your pocket. However, if you're working inside IR35, you're not able to utilise dividends and all of your income must be treated as salary, subject to PAYE.
There are various
tax deductible expenses for a limited company, and you can take advantage of these if you're working outside IR35. A limited company contractor has the chance to deduct costs like travel, training, insurance equipment - and even part of your home office, if you work from home - all of which reduce your taxable profits. However, if you're working inside IR35, your ability to claim these expenses becomes restricted, with many contractors missing out.
The Limited Company Tax Benefits of Working Outside IR35
There are a lot of advantages that come with contracting outside IR35, giving you various limited company tax benefits to take advantage of. For example, you have the chance to retain more income through the efficient use of salary and dividends. You can also claim legitimate business expenses to lower your overall tax burden, such as transport costs and accounting fees, as long as they are wholly and exclusively related to the business. You're also able to enjoy flexible pension planning and investing through your business, which you don't necessarily have access to if you're working inside IR35.
If your work pattern supports an outside IR35 status - for example, if you work with multiple clients, you take on project-based roles, and you have independence from day-to-day management - a limited company quickly becomes a worthwhile consideration building improved tax planning and long-term financial success.
Take Advantage of Limited Company Tax Benefits
To fully benefit from the tax advantages available outside IR35, you'll need to ensure that your contracts are IR35 compliant, which means they highlight that you're an independent contractor, that the work you do is project-based, and what you do isn't controlled by the client. You'll also need to carry out regular IR35 assessments to ensure nothing has changed, as even small changes could impact whether your work falls inside or outside the legislation. It's also a good idea to work with an accountant who's experienced in limited company tax planning, as they can structure your salary and dividends correctly, ensuring you stay compliant with changing tax rules, but also benefit financially. When done correctly, the savings and financial control that's available to you as a limited company contractor are undeniably, especially when they're compared to working with an umbrella company or being an employee who's paid via PAYE.
Reduce Limited Company Tax
As a contractor, you might find yourself worrying about paying too much tax, too little tax or doing something wrong. It's something that a lot of contractors worry about, after all, you don't want to end up paying more tax than you need to. Thankfully, there are a number of ways to reduce limited company tax, and they're all allowed in the eyes of HMRC.
1. You can reduce limited company tax by paying yourself a tax-efficient salary - this tends to be just above the NIC threshold, ensuring you still qualify for the full state pension when the time comes - and paying the rest to yourself in dividends . These are in a lower tax band, which reduces the amount of tax you need to pay on your total earnings.
2. You can also reduce limited company tax by making employer pension contributions. These are paid before your taxable profits are calculated, reducing the figure you're required to pay tax and NICs on.
3. You also have the opportunity to claim allowable business expenses. If you've spent money on expenses related to your business, such as equipment or mileage, you can claim the costs as expenses. This further reduces your taxable profit, saving you money.
Set Up a Limited Company Online
To take full advantage of the tax efficiencies available to you when you're working outside IR35, you'll need to operate through your own limited company. Though IR35 status depends on how you work and the nature of your various contracts, you must have a limited company in place to benefit from being genuinely self-employed in the eyes of HMRC. The good news is that setting up a limited company is relatively straightforward, and it can be done entirely online. There's no need to go anywhere, you can do everything from the comfort of your own home or workplace. The process is fast, affordable and accessible to anyone.
You'll need to choose a company name, appoint a director - in most cases, this is yourself - and decide how shares will be allocated. Once you're registered and your limited company is set up with Companies House, you'll receive your company number and incorporation documents. Then you can set up a business bank account, register with HMRC, and organise VAT if you need to. It really is as simple as we're making it sound, but expert help is always available.
Enjoy the Tax Benefits of Contracting Outside IR35
IR35 has added a layer of complexity to the world of contracting, but that doesn't mean setting up a limited company isn't still a worthwhile endeavor. For contractors with contracts outside IR35, the tax efficiency, control and long-term financial benefits are still well worth it. By understanding the difference between working inside and outside IR35, prioritising limited company tax planning and ensuring compliance, you can maximise your earnings and take full advantage of the benefits that come with being a limited company contractor.
At
Go Limited, we know that setting up your own limited company can feel daunting, but it doesn't need to be. When you're ready to get started, setting up your limited company online is the easiest way to get started, and the benefits will quickly fall into place.
FAQs: Tax Implications of IR35 for Limited Companies in the UK
1. What is IR35 and how does it affect limited company contractors?
IR35 is a piece of UK tax legislation designed to identify 'disguised employment'. If HMRC deems your contract to be 'inside IR35', you're treated as an employee for tax purposes and must pay Income Tax and National Insurance Contributions (NICs) accordingly. This significantly reduces the tax benefits of operating through a limited company.
2. What's the difference between being inside or outside IR35?
1. Inside IR35: You're taxed like an employee and can't take advantage of dividend payments or many business expenses. Your tax liabilities increase, but you don't get the employment perks such as holiday or sick pay.
2. Outside IR35: You're considered genuinely self-employed, which allows you to benefit from tax planning through salary/dividends, claimable business expenses, and greater control over your income.
3. How does IR35 impact my tax planning as a limited company contractor?
If you're outside IR35, you can pay yourself a modest salary and supplement your income with dividends, which are taxed at a lower rate. You can also deduct allowable business expenses. If you're inside IR35, your income is subject to PAYE, and your tax planning options become very limited.
4. Can I still claim expenses if I'm inside IR35?
Only a restricted range of expenses are allowed if your contract is inside IR35. Most day-to-day business expenses such as travel or home office costs are no longer claimable. However, some essential costs like accountancy fees may still be permitted.
5. What are the key tax benefits of working outside IR35?
1. Access to dividend payments, reducing overall tax
2. Ability to claim allowable business expenses (e.g. travel, equipment, software, insurance)
3. More flexibility in pension contributions and business investment
4. Greater control over how and when you take income
6. How can I reduce my limited company tax if I'm outside IR35?
You can reduce your tax liability by:
1. Paying yourself a tax-efficient salary (usually just above the NIC threshold)
2. Drawing dividends instead of higher PAYE wages
3. Making employer pension contributions (these are tax deductible)
4. Claiming allowable expenses that are wholly and exclusively for business purposes
7. Do I need to reassess my IR35 status regularly?
Yes. Even small changes in your working practices or contract terms can affect your IR35 status. Regular reviews help you stay compliant and ensure you're not accidentally triggering an 'inside IR35' scenario. Seeking advice from an IR35 specialist or accountant is highly recommended.
8. How do I know if I'm truly outside IR35?
Generally, if you:
1. Work independently without client supervision
2. Can substitute yourself with another contractor
3. Take on project-based work for multiple clients
4. You may fall outside IR35. However, a formal contract review and assessment by an expert is the most reliable way to determine this.
9. Is setting up a limited company complicated?
Not at all. You can set one up online in a matter of hours. You'll need to choose a company name, appoint a director (usually yourself), allocate shares, register with Companies House, and then set up a business bank account and register for taxes with HMRC. Go Limited can help make the process even easier.
10. Should I always choose a limited company if I'm contracting?
Not necessarily. If most of your contracts are inside IR35 or short-term, using an umbrella company may be simpler and more cost-effective. But if your contracts are outside IR35 and you plan to contract long-term, a limited company offers far greater financial advantages and control.
Important:
Please note: Any rates and thresholds mentioned in this article are correct at the time of publishing and may be subject to change.
When choosing an accountant, look for one with proven experience and expertise in the contracting sector, particularly around areas like IR35, limited company tax matters and off-payroll working. Formal qualifications are important, but relevant hands-on knowledge matters just as much — especially in a complex and fast-changing landscape like this.
