IR35 in the private sector

7th January 2019

Thousands of contractors and freelancers face higher tax bills from April 2020 when IR35 reforms are extended to the private sector. 

Individuals who fall into this bracket will be required to pay more income tax, and national insurance contributions (NICs) at 12% rather than their lower rate. 

The extension, which was announced in Budget 2018, aims to crackdown on taxpayers who fool HMRC over their employment status.

The move is expected to net around £1.3 billion for the Treasury by 2023 and will affect genuine freelancers, contractors, consultants and other non-permanent staff in the private sector. 

IR35 in the private sector: how will work?

Hiring organisations are responsible for determining the tax status of off-payroll workers under IR35, which will apply when you provide work through your own company for another business. 

You should pay income tax at your marginal rate, and NICs at 12% if the way you work is similar to that of a full-time employee. 

Private sector contractors usually pay less tax and NICs as it stands, but larger businesses will be responsible from April 2020 for deciding which contractors need to pay more income tax and NICs. 

The extension of the legislation will not apply to smallest 1.5 million private sector companies supplying personal services.

IR35 in the private sector: impact on businesses

Businesses that take on freelancers or contractors in the public sector decide whether or not a worker falls within IR35, and that will be the case for those in the private sector from April 2020. 

As such, there’s a precedent to follow here – with many public sector businesses embroiled in increased red tape, time and resources to grapple with the complex legislation. 

Projects have been put on hold as they deal with skills shortages caused by many workers leaving the public sector. It remains to be seen if it will affect the private sector in the same way. 

IR35 in the private sector: impact on contractors

With businesses delaying projects in the public sector, some freelancers can expect to see a drop in the number of private sector contracts available to them after April 2020. 

Many contractors have had to increase what they charge companies for work in an attempt to counteract the loss of income from having fewer contracts available to them. 

Some freelancers and contractors fear the move will result in them being reclassified as employed and paying more tax as a result. They also cite fears of not having any of the benefits enjoyed by full-time employees. 

Other core concerns surround the complexity of the rules and how this would affect genuinely self-employed people, rather than those trying to trick the taxman. 

Get in touch

There’s far more to IR35 than this blog touches on. For more information, email or call 0117 973 3377. 

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