IR35 change: Self-employed to pay more tax from today – are you affected?

AROUND 170,000 self-employed workers are set to pay more tax from today as the government implements new employment laws.

The so-called IR35 change hits those working in the private sector who pay less tax by setting themselves up as private companies.

Around 170,000 self-employed workers are set to pay more tax from today, April 6Credit: Alamy

The rules mean the business you work for rather than yourself will be responsible for deciding your tax status.

Those deemed to be inside the rules are taxed as an employee, but don’t receive employment rights like holiday or sick pay.

The IR35 change was first introduced in the public sector in 2017.

During the Budget in 2018, former Chancellor Philip Hammond then announced plans to implement it for the private sector too.

What is IR35?

IR35 are off-payroll working rules, which for the past 20 years have prevented people avoiding paying their dues.

The rules make sure that self-employed workers pay roughly the same amount of tax and National Insurance contributions as employees.

Reforms to it were introduced by Chancellor Philip Hammond and are meant to tackle so-called disguised employment.

This is a term for those who provide freelance services through personal service companies to reduce their tax bills, but who the tax authorities believe should be treated as employees and taxed through the payroll.

This was meant to happen April 2020, but the change was delayed until today, April 6, 2021, due to the coronavirus crisis.

The government has estimated the change affects 170,000 contractors, but it only applies to medium and large-sized businesses.

It says genuine freelancers and self-employed workers won’t be affected.

The change comes as sole directors of limited companies have missed out on government support during the pandemic.

Ed Molyneux, co-founder of accounting software firm FreeAgent, told The Sun he is worried the change will “come too soon” for many contractors.

He said: “This is the most significant tax change in the freelance and contracting economy for years.

“It essentially pushes many people who are contracting within the private and private sectors into quasi-employment, albeit without any of the protections that they would receive if they were actual employees.

“But those who will be most impacted are the same freelancers and contractors who have been worst affected by the pandemic, and who are still dealing with the ongoing economic fallout from it.”

Who does the change affect?

The changes hit those working in the private sector, such as IT workers and management consultants, who pay less tax by setting themselves up as private companies.

This is usually set up as a limited company, but it could also be a partnership, a personal service company as well as an individual.

You may be affected by these rules if you are:

A worker who provides their services through their intermediary
A client who receives services from a worker through their intermediary
An agency providing workers’ services through their intermediary

From April 6, your client should provide you with a “status determination statement” if the rules apply and explain their decision.

If the rules apply, it must deduct tax and National Insurance contributions from your fees and pay it to HMRC.

Previously, contractors have determined their employment status for tax purposes themselves.

How will I be affected?

Calculations by advice website Contractor Calculator show a contractor earning £55,000 with expenses of £3,000 a year will be £7,489 worse off.

This is if the company passes on the entire tax burden onto a contractor, as businesses will be hit with extra taxes by treating freelancers as employees.

If the business instead decides to foot the bill, you’d still be £3,119 worse off unless you raised your rates.

Of course, the exact amount you’ll lose each month depends on how much you earn but some can expect a yearly pay cut of roughly 20%.