What is IR35, what does it mean for those impacted and what are the opportunities for advisers?

27 February 2020
IR35 is a piece of legislation that became law in 2000 allowing HMRC to collect an additional payment where a contractor is an employee in all but name.

For example, if a contractor is operating through an intermediary, such as a limited company, and if it wasn’t for that intermediary they’d be an employee of their client, this is when IR35 would apply. This legislation was introduced in response to the growth of what the government termed ‘disguised employment’.

When working through a limited company, a worker could pay less tax than a traditional employee performing exactly the same role. The IR35 rules apply to contracts which are performed in the manner of an employee rather than a self-employed person working in business on their own account. Although the tax benefit associated with working through a company has gradually been eroded over the years, there’s still a significant financial cost if your work is caught by IR35.

Although there have been calls for and promises of a review of the IR35 rules, off-payroll working rules are currently set to change on 6 April 2020. From this date, all public authorities and medium and large sized businesses in the private sector will be responsible for deciding the employment status of their workers rather than the worker having that responsibility. The private sector includes third sector organisations, such as some charities.

The rules apply to private sector companies that meet two or more of the following conditions:

  • An annual turnover of more than £10.2 million
  • A balance sheet total of more than £5.1 million
  • More than 50 employees

How will a contractor be paid if they’re caught by IR35?

In some cases, a contractor may only be offered the role if they become a traditional PAYE employee, or they may take up the contract and operate through a PAYE umbrella company.

If they take the role as a limited company contractor, their fee-payer/client will be responsible for making the appropriate deductions from their turnover. This includes income tax and employee’s National Insurance contributions. The fee payer must also make deductions for employers’ National Insurance contributions and the Apprenticeship Levy. But the contractor will still be responsible for any additional tax due as it’s possible for one contract to be treated in one way with others treated differently depending on the circumstances.

However one of the most unfair aspects of IR35 is that if a contract is deemed to be caught by IR35 and the contractor continues to operate through a personal service company, then they’ll be taxed as an ’employee’, but have none of the statutory employment rights associated with traditional workers.  There’ll be no entitlement to benefits such as holiday pay, statutory sick pay, maternity or paternity pay, pensions or redundancy.

But things are different if operating via a PAYE umbrella company. A contractor is an employee of its chosen umbrella employer and with that comes a responsibility for the umbrella firm to provide all normal HR functions of any employment relationship. Umbrella employers provide contractors with full employment rights, all statutory benefits including holiday pay, maternity pay, paternity pay, sickness pay, pensions, redundancy pay and adoption pay. The contractor has the best of both worlds. The stability and benefits of being employed whilst also having the freedom and flexibility to undertake contract work for numerous end-clients.

Even when undertaking placements for different recruitment agencies, there’s continuity of employment. This history can be particularly important for anyone looking to access personal finance such as mortgages or loans. For anyone working on very short-term contracts or working for multiple clients simultaneously, the umbrella consolidates earnings from the various assignments into one pay packet.  This means that all tax and National Insurance contributions are taken care of together for the contractor, rather than having to consider earnings from each assignment separately.

What’s likely to happen?

It’s inevitable that some will ditch their personal service company and become a true employee. Some will continue as they are and take each contract on its own merits. For some within that cohort there’ll be no real impact and the world will continue to turn as it did before as they were and always will be outside of IR35. Others in that cohort will take account of the end client decision on whether they are within or outside of IR35 for that particular contract and negotiate their rate appropriately taking into account the tax consequences. But there will be a further group that will either choose for themselves or be forced by their end client to operate through a PAYE umbrella company.

What are the opportunities for advisers?

This is what creates a tremendous opportunity for advisers.  Before taking a decision one way or the other all current contractors should seek professional advice. This will initially be about their tax position but it also creates an opportunity to talk to clients about their situation from a protection and long term savings perspective.

From a protection point of view it’s an opportunity to review existing cover to see whether it’s still appropriate or needs to be changed. For example, for those that choose to maintain their personal service company, it will be important to maintain any protection that already replaces the normal employee benefits, for example income protection, death in service through a relevant life plan or private medical insurance even though they may be taxed differently.

For those choosing a different operating model, advisers should consider the portability of existing arrangements. For example if they have a relevant life plan how easy is it to continue as a personal policy?  If they currently have company sponsored income protection, can this be continued on a personal basis?

If a client doesn’t already have such cover, now may be the time to remind them how vulnerable they are by not having cover. And if they decide to put cover in place now, make sure it’s arranged in a way that’s flexible enough to cope with future changes in their employment status.

There’ll also be many advisers about to start end of year tax planning with their customers.  This often involves decisions on how much to put into a pension. But maybe this year there should be a greater emphasis on their protection needs than would previously have been the case.

Find out more about putting suitable protection in place for your clients.


The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.

All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.



About the author

Ian Smart

Product Architect

Ian has worked in financial services since 1984 and has provided technical support and been involved in product development since 1992. He joined Royal London in 2001, initially as technical product manager for Bright Grey, before becoming head of product development & technical support for both Bright Grey and Scottish Provident and latterly product architect for Royal London.

This website is intended for financial advisers only and shouldn't be relied upon by any other person. If you are not an adviser please visit royallondon.com.

The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.