Limited Company Inside Ir35 Calculation
- Adil Akhtar
- 22 hours ago
- 22 min read
What Being Inside IR35 Means for Limited Company Contractors in 2025 — Your Step-by-Step Inside IR35 Tax Calculation Guide
What Does "Inside IR35" Really Mean for Your Limited Company?
Picture this: You’re staring at your payslip and thinking, "Why does the tax bite feel so much heavier this year?" That’s pretty common for contractors caught inside IR35.
IR35 is a tax legislation designed to catch "disguised employees" — contractors who provide services through a limited company but work in much the same way as a regular employee. If HMRC or your client’s agency determines your contract is inside IR35, you’re taxed similarly to an employee, but through your limited company, which changes how your income and tax interact.
Inside IR35 means:
● Your income from that contract is treated as “employment income” subject to full PAYE income tax and employee NICs (National Insurance Contributions).
● Your limited company must operate payroll to deduct these taxes before you get paid.
● You lose the tax advantage of taking most of your income as dividends, which usually attract lower tax rates.
The big picture: your take-home pay drops, and your company’s tax obligations grow — the cost burdens impact you personally and your business finances.
Latest 2025/26 UK Income Tax and NIC Rates for Limited Company Contractors Inside IR35
It's crucial to be on top of the 2025/26 tax year rates and thresholds since IR35 calculations revolve around these. Here’s a snapshot:
Tax Element | Threshold / Band | Rate |
Personal Allowance | £12,570 | 0% (tax-free) |
Basic Income Tax Rate | £12,571 to £50,270 | 20% |
Higher Rate | £50,271 to £125,140 | 40% |
Additional Rate | Above £125,140 | 45% |
Employee NI (Class 1) | £12,570 to £50,270 | 12% |
| Above £50,270 | 2% |
Employer NI (Class 1) | Above £9,100 | 13.8% |
Important: The £12,570 personal allowance remains frozen in 2025/26 despite inflation pressures, so beware of creeping tax bills.
Scottish income tax rates diverge from the rest of the UK — basic starting at 20%, but multiple income tax bands thereafter. Welsh rates align with the rest of England.
In inside IR35 cases, your limited company deducts:
● Income tax & employee NIC from your “deemed employment income” via PAYE.
● The company also pays employer NIC (13.8%).
How to Calculate Your Taxable Income Inside IR35 — The Basic Formula
Now, let’s get practical: how does this work out in numbers?
Step 1: Start with your contract income (gross payment received by your limited company).
Step 2: Deduct any allowable expenses (but inside IR35, allowable expenses are narrow — mainly employer NICs and pension contributions).
Step 3: Calculate employer NIC at 13.8% on the post-expense amount above £9,100.
Step 4: Calculate the “deemed payment” i.e., payment subject to PAYE tax and employee NIC, by deducting employer NIC and pension contributions from gross income.
Step 5: Apply Personal Allowance (£12,570) and calculate the income tax and employee NIC due.
Step 6: Pay yourself the remainder as net salary.
Let’s bring this to life with an example.
Case Study: Sophia’s Inside IR35 Contractor Pay Calculation
Sophia, a digital marketing consultant from Bristol, earns £60,000 annually through a contract now determined inside IR35 for 2025/26. Her limited company has minimal expenses — just employer pension contributions of £2,000 per year.
Calculating Sophia’s tax:
● Gross income: £60,000
● Employer pension contributions: £2,000→ Deduct from gross income: £60,000 – £2,000 = £58,000 taxable for NIC.
● Employer NICs: 13.8% on £58,000 – £9,100 = 13.8% on £48,900 = £6,748
● Deemed payment (salary before tax): £60,000 – £6,748 – £2,000 = £51,252(This is the amount subject to PAYE tax and employee NICs.)
Now calculate employee NIC and income tax on £51,252:
● Personal Allowance: £12,570 tax-free.
● Taxable Income: £51,252 – £12,570 = £38,682
● Income tax: 20% on £38,682 = £7,736.40
● Employee NICs: 12% on £50,270 – £12,570 = 12% on £37,700 = £4,524(plus 2% on £51,252 – £50,270 = 2% on £982 = £19.64)Total employee NIC = approx. £4,544
Total tax and NIC paid = £7,736.40 (income tax) + £4,544 (employee NIC) + £6,748 (employer NIC) = £19,028.40
Sophia’s net income after tax and NICs is: £60,000 – £19,028.40 = £40,971.60
Compare this to pre-IR35 where Sophia could have withdrawn large dividends taxed at roughly 8–32%, plus a small salary.
What Expenses Can You Deduct Inside IR35?
Here's the tricky bit: unlike outside IR35, where legitimate business expenses can greatly reduce your taxable profit, inside IR35 deductions are heavily restricted.
Even my long-standing clients who run multiple ventures get caught out here. The only really deductible expenses inside IR35 are:
● Employer NICs paid by the company.
● Employer pension contributions (within approved limits).
● Some non-taxable benefits (rare).
Office rent, travel, or equipment costs don’t reduce your deemed payment.
This means that any 'day-to-day' operating expenses basically don’t reduce your taxable income inside IR35, which is a shock for many.
What About Dividend Tax If Inside IR35?
Dividends tend to be limited or not applicable when inside IR35 because your income is processed as salary via PAYE. Dividend payments need to come from post-corporation tax profits, but because IR35 deemed payments are taxed like employment income, the net profits available for dividends shrink considerably.
Many contractors I’ve guided in London and Edinburgh have seen their historic dividend tax planning wiped out.
The key takeaway: Inside IR35, your tax planning on dividends is severely constrained — expect more PAYE-style deductions and less scope for tax-efficient dividends.
Handling Multiple Income Sources — What if You’re Inside IR35 but Also Self-Employed or Have Other Income?
Be careful here because it’s a tax maze when you have multiple income streams.
Say you're inside IR35 on your contract but also run an online shop as a sole trader or have rental property income.
Your pay from the limited company inside IR35 will have PAYE deducted already — straightforward — but when your Self Assessment tax return is completed, all income streams aggregate and impact your overall tax band.
Example:
● £40,000 deemed employment income inside IR35 through your limited company.
● £10,000 self-employed profit from your side hustle.
● £5,000 property rental income.
Your total taxable income is £55,000, which pushes you into the 40% higher rate for any income exceeding £50,270 for 2025/26.
Practical tip: Keep meticulous records and consult your accountant when dealing with mixed income. Some clients have unwittingly paid 40% tax on self-employed profits, thinking those were in the basic tax bracket.
What If Your Contract Income Changes Mid-Year or You’re On Emergency Tax?
Emergency tax codes — a bugbear for many contractors — strike when HMRC lacks full details on your income. If caught inside IR35 and HMRC hasn’t issued the right tax code, you might face:
● Excessive PAYE deductions via emergency tax.
● Missed personal allowance allocations.
● Confusion with your National Insurance records.
A real case: A client from Manchester received emergency tax for six months due to late submission of IR35 status by the client. After intervention with HMRC, a refund was processed, but it took months. For people like this, checking your personal tax account regularly can spot errors early.
You can check your tax codes and PAYE deductions on the official personal tax account.
Scottish and Welsh Tax Rate Differences Inside IR35
If you’re working inside IR35 in Scotland or Wales, be mindful:
● Scottish taxpayers have a more complex tax band structure — five rates above the personal allowance, starting at 20% and stepping up through 21%, 42%, 47%, etc.
● Welsh taxpayers pay the same rates as England.
A client contractor in Edinburgh got caught off guard paying 21% on initial taxable income, higher than England’s flat 20% band.
Check the most current Scottish tax bands here — this is key since your employer in the limited company deducts the right tax rate.
In this section, we’ve laid out a clear framework and practical calculations for limited company contractors inside IR35:
● Inside IR35 means PAYE-style income tax and NIC liabilities on your earnings through your company.
● Employer NICs and pension contributions are your only significant deductible expenses.
● Tax rates and bands for 2025/26 remain frozen, with personal allowance at £12,570.
● Calculations on deemed employment income show substantial tax bite compared to dividend income.
● Handling multiple incomes carefully is vital.
● Watch out for emergency tax codes and Scottish or Welsh variations that impact deductions.
IR35 Tax Calculator 2025-26
Checking Your Tax Code and Verifying Inside IR35 Tax Calculations — A Hands-On Guide for Limited Company Contractors in 2025
Why Checking Your Tax Code Is Your First Line of Defence Against Tax Surprises Inside IR35
None of us loves tax surprises, but here’s how to avoid them: your tax code is the key to understanding how much tax HMRC thinks you owe and whether you’re being under- or over-taxed. For contractors operating inside IR35 via limited companies, tax codes become even more critical, because the whole IR35 calculation hinges on payroll deductions based on your code.
Your tax code tells your employer (or your company’s payroll department) how much income tax to deduct from your salary. It reflects your personal allowance, any benefits, unpaid tax from prior years, or any special circumstances (like the high-income Child Benefit Charge).
What Does a Tax Code Look Like, and How to Decipher It?
Think of your tax code like a postcode for your income. It directs how much tax-free pay you should get. In 2025/26, the standard tax code is 1257L, which means £12,570 tax-free personal allowance.
Here’s a quick guide to code components:
● Numbers: Indicate your personal allowance (the number times 10 equals the tax-free amount).For example, 1257L → £12,570 allowance.
● Letters: Indicate special circumstances. L means standard personal allowance. M means married allowance transferred, K means you owe tax already.
● Emergency tax code: Such as 1257L on a suffix 0 (1257L0) or even 0T, indicates emergency PAYE code applied.
Step-by-Step: How to Check Your Tax Code in 2025
● Log into your HMRC Personal Tax Account at www.gov.uk/check-income-tax-current-year
● Navigate to “Income Tax” and view your “Tax Codes” section.
● Verify the tax code currently applied to your inside IR35 income.
● Check if any notifications mention an emergency code or estimated tax.
Practical Anecdote: When a Wrong Tax Code Cost a Freelancer Thousands
Take Mike from Leeds, who works through his limited company on a contract inside IR35. Since his client switched payroll providers mid-year, his tax code didn’t update correctly, applying an emergency tax code.
Result? Mike paid £3,000 extra tax over six months — which wasn’t automatically refunded until he requested a manual correction from HMRC after submitting his Self Assessment.
Lesson: Regularly monitor your tax codes, especially after contract or payroll changes. If you spot an emergency code, contact HMRC promptly or use the personal tax account to check or challenge the code.
Step-by-Step Guide to Verify Your PAYE Deductions Inside IR35
Once your tax code is confirmed, it’s time to verify the actual PAYE deductions. HMRC’s pay-as-you-earn system should deduct the correct income tax and employee NIC.
Here’s how:
Get your final P60 or P45 from your limited company — this shows total pay and deductions for the year.
Check your real gross income from the contract payments.
Confirm employer payments for NIC and pension contributions.
Use this simple worksheet to check your PAYE deductions:
Description | Amount (£) |
Contract gross income for tax year |
|
Less pension contributions (employer) |
|
Taxable income after expenses |
|
Employer NIC (13.8% on income above £9,100) |
|
Deemed payment (income subject to PAYE) |
|
Personal allowance (£12,570 for 2025/26) |
|
Taxable income after allowance |
|
Income tax due (apply 20%, 40%, or 45% rates) |
|
Employee NIC due (12% up to £50,270; 2% after) |
|
Total PAYE deductions expected |
|
Actual PAYE deductions (from P60/P45) |
|
If your actual PAYE deductions are significantly different from the calculated expected deductions, this indicates errors that need addressing.
Case Study: Sarah’s Overpaid Tax and How She Claimed a Refund
Sarah from Newcastle worked inside IR35 for two contracts in the 2024/25 tax year. When she checked her P60, she noticed her PAYE deductions were almost £2,000 higher than she expected given her contract income and tax code.
After calculating on a worksheet like above, Sarah submitted a Self Assessment tax return and claimed a refund from HMRC. It was her diligence and willingness to carefully verify details that nabbed her the money back — most contractors don’t check, and thus leave money on the table.
How to Handle Multiple Income Sources and Tax Band Effects Inside IR35
Now, let’s think about your situation — if you’re self-employed or have income from elsewhere alongside an inside IR35 contract, your tax picture gets more intricate.
● Your PAYE income from your limited company counts towards your taxable income.
● Additional income, such as rental profits, dividends, or self-employed earnings, is added to this when calculating overall tax liability.
● If total income crosses higher or additional rate thresholds, you’ll pay more tax on extra earnings.
● Beware of tax on benefits, such as the High Income Child Benefit Charge, triggered on income above £50,000.
If you’re salaried inside IR35 and also self-employed, you must complete a Self Assessment tax return to reconcile the full tax bill. HMRC’s system doesn’t automatically aggregate PAYE and other income sources, so missing this can mean unreported income or unexpected tax bills later on.
Emergency Tax Codes — What to Do If You’re Being Taxed Too Heavily
Emergency tax codes can be common when clients or agencies delay submitting IR35 status or payroll changes.
Signs to spot:
● Payslips showing large tax deductions despite low net pay.
● Your payslip has codes like 1257L0W or 0T.
● No personal allowance applied when you expect one.
Actions to take:
● Contact HMRC directly to request a tax code update.
● Use the personal tax account portal to verify and update your details.
● Keep copies of payslips and correspondence for future Self Assessment if necessary.
● When you file tax returns, overpaid tax will usually be refunded, but better to tackle early.
Understanding National Insurance Contributions Inside IR35
Many people focus on income tax but neglect NICs, which in inside IR35 cases add a substantial bite.
Both employee and employer NICs apply:
● Employer NIC is a 13.8% company cost above £9,100 earnings.
● Employee NIC is 12% on earnings between £12,570 and £50,270, and 2% thereafter.
● Your limited company pays employer NIC, but it effectively reduces the amount available for your salary.
Key insight: Employer NICs are deductible when calculating deemed payment, but increase your company’s costs, squeezing profit margins more than tax alone.
Common Pitfall — Confusing CIS Deductions with Inside IR35 PAYE Deductions
Be careful here, because I’ve seen contractors trip up when mixing Construction Industry Scheme (CIS) deductions and IR35 PAYE tax.
CIS is a withholding tax scheme for construction contractors, deducted at source and recoverable via Self Assessment.
Inside IR35 payments are through PAYE deductions, which are different. If you confuse these, you risk:
● Under- or over-paying tax.
● Misreporting earnings in Self Assessment.
● Missing out on refunds.
Ensure you clearly identify payments subject to IR35 and those impacted by CIS, especially for construction contractors juggling multiple schemes.
How Scottish and Welsh Tax Variations Affect Your Inside IR35 PAYE Calculations
Scottish tax rates apply progressively with five bands. For example, a Scottish contractor with a deemed payment taxed inside IR35 pays taxes starting from 20% up to 47% for the highest bands. Welsh rates mirror England closely.
Payroll administrators must apply the correct tax code reflecting your domicile. Your tax code on your payslip will indicate if Scottish rates apply (starts with ‘S’).
Double-check your payslips to confirm the correct tax band is reflected — mistakes happen and can cost some clients hundreds.
Quick Checklist to Take Control of Your Inside IR35 Payroll and Tax Situation
● Review your contract IR35 status regularly, especially after renegotiations or changes.
● Log into your personal tax account monthly to monitor tax codes and payments.
● Double-check payroll payslips and P60/P45 for correct tax codes and deductions.
● Keep detailed records of all income streams and expenses.
● Use a worksheet to reconcile expected and actual tax deductions.
● Submit Self Assessment returns timely to include all income sources.
● Contact HMRC promptly if you spot emergency tax codes or unusual deductions.
● Don’t confuse CIS with IR35 payroll deductions—keep these separate.
● If you’re Scottish or Welsh taxpayer, confirm correct tax rates applied.
● Seek expert help if multiple incomes or complex contracts are involved.
In this section, we’ve covered:
● The critical importance of understanding and checking your tax code.
● How to check your tax deductions using real payslips, P60s, and a practical worksheet.
● The impact of multiple income sources and how they affect tax liability inside IR35.
● Dealing with emergency tax codes, NICs, and the subtle differences between CIS and IR35 deductions.
● Regional tax variations in Scotland and Wales adding extra complexity.
● Actionable checklists to proactively manage your tax position and avoid costly errors.
Advanced Tax Optimisation and Real-World Scenarios for Limited Companies Inside IR35 in 2025
How Business Owners Can Optimise Tax Inside IR35 Without Crossing the Line
So, the big question on your mind might be: “Given my contract is inside IR35, is there still room to make my tax position better?” Well, yes, but it’s a tightrope walk.
Inside IR35, your tax planning options are limited, but savvy contractors and business owners can still optimise within the rules. Here’s the lowdown from real-life cases I’ve encountered:
Pension Contributions — The Hidden Gem for Inside IR35 Contractors
One of the few effective ways to reduce your taxable income inside IR35 is via employer pension contributions paid through your limited company.
Because employer pensions reduce your deemed payment (on which PAYE is charged), they effectively lower your income tax and NICs.
In practice, I advised a client in Birmingham, Tom, who maximised annual employer pension contributions up to £40,000 (the current annual allowance for most) — this reduced his taxable income inside IR35 by thousands, knocking his tax bill back substantially.
Key points:
● Pension contributions must be correctly made before the tax year-end and recorded.
● Contributions reduce deemed employment income, not your company’s total income directly.
● Contributions are free from NICs, unlike salary payments.
Action tip: Work with an accountant to structure pension payments optimally, ensuring contributions adhere to allowance limits to avoid unexpected tax charges.
Salary vs. Dividend Mix — What Happens to Dividends Inside IR35?
Remember, inside IR35 deemed payments are treated as salary, so dividends on the same profits are tricky. However:
● Your limited company may have non-IR35 income or retained profits outside deemed payments.
● Dividends can still be paid on profits unrelated to IR35 contracts.
Case in point: Ellen runs a limited company with both IR35 contracts and small out-of-scope consulting work. She declared salary on IR35 income but took small dividends on non-contract company profits.
Important: Dividends are paid after corporation tax and don’t reduce employment income for PAYE. Therefore, blending some non-IR35 income via dividends can improve cash flow and tax optimisation but requires meticulous accounting separation.
Keeping Business Expenses — What Can You Still Claim?
Inside IR35 restricts expense claims against your IR35 income, but your company might have other legitimate business expenses to claim against profits outside deemed payments.
Some clients with side businesses or diverse company activities juggle expenses carefully — for example, software subscriptions, office rent, training costs for non-IR35 work.
Be mindful: HMRC penalises companies claiming disallowed expenses inside IR35, which triggers investigations.
Client Case Study — The Freelancer Caught out by Underreported Side Hustles
Claire, a contractor from Manchester, declared IR35 income correctly but forgot some rental income and freelance teaching in her Self Assessment. HMRC cross-checked via their data-sharing and imposed a penalty, plus backdated tax and NICs.
What saved Claire was prompt disclosure and accurate record-keeping, which helped reduce penalties.
Lesson: Always report all income streams, even small side hustles that add up.
High-Income Child Benefit Charge (HICBC) and Inside IR35
If your combined income inside IR35 plus any other sources exceed £50,000, beware the High-Income Child Benefit Charge.
I’ve seen contractors overlook this, leading to unexpected bills when submitting Self Assessment.
You can opt out of receiving Child Benefit payments to avoid the charge or budget to repay some via tax returns.
Emergency and Special Scenarios — From CIS Confusion to Revised Contracts
Let’s explore some uncommon but important scenarios:
● CIS contractors inside IR35: Construction contractors under CIS may have deductions at source and inside IR35 payroll. I dealt with a contractor who double-counted CIS deductions and reported them improperly, causing tax overpayments that required claims for refunds.
● Mid-year IR35 status change: When a contract turns inside IR35 mid-year, you must adjust your payroll and possibly submit an amended Self Assessment. Several clients had contracts extending across tax years, confusing payroll admins — always keep payroll informed promptly.
● Remote work and allowance adjustments: With more contractors working remotely, sometimes across devolved regions, tax coding needs careful review to align allowance entitlements with location-based tax rules.
Step-by-Step Worksheet: Calculating Inside IR35 Tax Liability for Multiple Contracts and Income Streams
Below is a simple worksheet you can use if juggling multiple IR35 contracts, other self-employed work, or additional income sources:
Income Source | Gross Income (£) | Allowable Expenses (£) | Taxable Income (£) | Notes |
IR35 Contract 1 (Limited Co) |
| Employer NIC & pension |
| Deemed payment calculation |
IR35 Contract 2 (if any) |
| Employer NIC & pension |
|
|
Self-Employment Income |
| Business expenses |
|
|
Rental Income |
| Mortgage interest |
|
|
Dividend Income |
| - |
| Dividends taxed separately |
Total Taxable Income |
|
|
| Aggregate for tax bands |
Instructions:
Start with gross income per source.
Deduct allowed expenses per source.
Calculate deemed payment for IR35 contracts subtracting employer NIC and pensions.
Add all taxable income lines.
Apply 2025/26 tax bands to aggregate taxable income.
Calculate income tax, NICs, and dividend tax accordingly.
Unique Tip: Checking for Underpayments and Overpayments You Didn’t Know About
Don’t underestimate the value of regular tax audits for your company and personal returns.
A client in London discovered an underpayment because she’d forgotten to include a short contract’s inside IR35 income, triggering an unexpected bill from HMRC.
Conversely, another client recovered overpayments by spotting double deductions caused by payroll software errors.
A simple quarterly review with your accountant or through self-checks can save thousands.
Summary of Key Points
Inside IR35 means your limited company income is taxed through PAYE, losing many dividend advantages. Plan accordingly to avoid surprises.
Employer pension contributions remain a legitimate way to reduce your taxable income inside IR35.
Maximise these within allowance limits.
Dividends can still be paid on non-IR35 company profits but must be carefully separated from IR35 income.
Limited expenses can be deducted against IR35 income, mainly employer NIC and pensions; day-to-day costs usually don’t reduce taxable deemed payments.
Avoid claims that could trigger HMRC investigations.
Multiple income streams require you to aggregate income on Self Assessment, impacting tax bands and liabilities.
Keep detailed, separate records for each source.
Emergency tax codes and CIS deductions create complexity; monitor payslips and tax codes diligently to avoid costly errors.
Scottish and Welsh tax rate variations affect payroll tax deductions — confirm your tax code reflects correctly.
High-Income Child Benefit Charge can apply if your earnings exceed £50,000 across all income streams.
Mid-year IR35 status changes or multiple contracts must be clearly communicated to payroll and HMRC to ensure tax accuracy.
Regularly reviewing tax positions, using worksheets, and consulting specialists prevents overpayments or unexpected bills.
FAQs
Q1: How does being inside IR35 affect the take-home pay of a limited company contractor compared to outside IR35?
A1: Well, it’s worth noting that when you fall inside IR35, your limited company essentially becomes a “deemed employee” from a tax perspective. This means the income you earn through the company is subject to PAYE and National Insurance contributions before it reaches you as take-home pay. For example, a contractor in Manchester earning £75,000 through a limited company might take home roughly 25-30% less inside IR35 due to income tax, employer NICs, and employee NICs, compared to drawing dividends outside IR35. The key pitfall I often see is contractors not adjusting their budgets for this difference, leading to nasty surprises when payroll deductions are made within the company.
Q2: Can one limited company be partly inside and partly outside IR35 for different contracts?
A2: Yes, absolutely. IR35 status determination is done on a contract-by-contract basis, not company-wide. This means your limited company could have some contracts judged inside IR35 and others outside. For instance, an IT consultant might be outside IR35 with a long-term project client but inside IR35 for a short-term consultancy working within a client’s team. It’s crucial to keep separate records and run payroll accordingly, which can get complicated. Many make the error of treating all income the same, risking incorrect tax treatment and potential penalties.
Q3: How does IR35 inside status impact pension contributions made from a limited company?
A3: Good question. When working inside IR35, you pay yourself a salary through PAYE, which means pension contributions via salary sacrifice or from net pay can be affected. Employer pension contributions from your company remain allowable expenses, reducing corporation tax, but any personal contributions will come from your net pay after PAYE. For example, a contractor in Edinburgh making £40,000 salary inside IR35 must time their contributions carefully to maximise tax relief. In my experience, setting up employer pension contributions through the company payroll can be more tax-efficient in this scenario.
Q4: What happens if a taxpayer inside IR35 forgets to pay their deemed payment tax on time?
A4: This is a common area of confusion. The ‘deemed payment’ tax inside IR35 refers to the portion of your contract income subject to PAYE and NICs handled by your company. If this tax isn’t paid on time, HMRC can impose interest and penalties on unpaid liabilities, much like any late tax payment. I’ve seen cases where contractors assume the tax will be deferred or delayed, only to face unexpected bills. It’s vital to run timely payroll within your limited company and to keep sufficient funds aside to cover these obligations.
Q5: Are there any regional tax differences within the UK that affect IR35 calculations for limited companies?
A5: Yes, regional differences exist primarily through Scottish Income Tax rates, which apply if you are a Scottish taxpayer. So, if a limited company director resides in Scotland and falls inside IR35, their salary taxed through PAYE will be subject to Scottish rates, which differ slightly from the rest of the UK. For example, higher bands in Scotland start at lower thresholds, potentially increasing the tax rate. This subtlety often trips up contractors who live near borders or have clients elsewhere. Ensuring your payroll software reflects these regional rates is crucial.
Q6: Can multiple limited companies owned by one contractor share income inside IR35?
A6: Not in the straightforward sense. IR35 status is assessed per contract, so income from each contract must be accounted for separately. However, if one person operates multiple limited companies, each company must run its payroll based on its own contracts and IR35 determinations. The trap here is when clients or contractors attempt to shift income between companies to optimise tax, which HMRC scrutinises heavily. From my advisory experience, transparency and proper documentation are key to avoid the appearance of income shifting schemes.
Q7: What are the implications of IR35 inside status on dividend payments from a limited company?
A7: When inside IR35, most of the contract income is treated as salary subject to PAYE, leaving less corporation profit available for dividends. Dividends must be paid from retained profit after salary and deemed payment taxes. In other words, you might have a smaller dividend pot than usual. Many contractors mistakenly assume they can still take large dividend payments with minimal tax, but inside IR35, dividends tend to be smaller and less tax-advantageous. For example, a high-earning contractor in Bristol told me dividends dropped by over 50% once their contract was inside IR35.
Q8: How can a limited company contractor verify that their payroll tax code is correctly applied inside IR35?
A8: PAYE tax codes can be a sticking point. Contractors often overlook checking their payroll tax code applied by their own company’s payroll administrator or provider. To avoid under- or overpaying tax, you can check your current code on your personal tax account on HMRC’s website or your payslips. A common issue I’ve tackled is companies continuing with a generic standard code despite a change in circumstances, causing errors in net pay. If the code seems off, you or your accountant should contact HMRC promptly to update it.
Q9: Does IR35 inside status affect VAT registration or claims for a limited company?
A9: IR35 status itself doesn’t directly impact a company’s VAT registration or ability to claim VAT on business expenses. Your limited company’s VAT duties remain unchanged. However, contractors inside IR35 might have reduced genuine business expenses since their income is treated as employment income, which narrows allowable deductions for corporation tax, but VAT treatment stays standard. For example, I advised a client in Liverpool who was inside IR35 but still needed to register for VAT due to turnover. It’s essential not to confuse IR35 with VAT rules—they’re separate considerations.
Q10: What are the pitfalls when a contractor moves from outside to inside IR35 mid-tax year regarding tax calculations?
A10: Transitioning inside IR35 during a tax year complicates matters. Since outside IR35 income is often taken as dividends and inside IR35 as salary, you may face uneven tax payments and unexpected liabilities. Let’s say a contractor in London switches status in November; their company must payroll the deemed payment and apply PAYE for the remainder of the year, potentially resulting in a tax crunch if cash flow wasn’t planned. I always recommend running a mid-year tax projection to estimate liabilities and set funds aside to avoid cash flow shocks.
Q11: Are expenses claimed by a limited company limited inside IR35 different from those outside IR35?
A11: When inside IR35, allowable expenses shrink considerably because the deemed payment rules mirror employment earnings. For example, travel costs to a client's workplace cannot be claimed as business expenses inside IR35, whereas outside IR35 contractors may claim them. This means your company’s profits subject to corporation tax are higher inside IR35, increasing your overall tax bill. I've had clients face surprise tax bills simply because they didn’t adjust expense claims after an IR35 status change, so revising your expenses policy annually is critical.
Q12: How can limited company contractors self-audit their IR35 status to avoid penalties?
A12: While HMRC offers an official Status Determination Tool, I find that contractors benefit from performing a more nuanced self-audit focusing on actual working practices not just contract wording. For example, consider control (can you refuse work), substitution (can you send someone else), and mutuality of obligation (is ongoing work expected). I once guided a client in Newcastle through identifying subtle control aspects that pushed them inside IR35, prompting contract renegotiation. Regularly reviewing both contracts and daily working realities is the best defence against HMRC penalties.
Q13: What happens if a limited company inside IR35 pays dividends before processing deemed payment tax?
A13: This is a classic cash flow and compliance trap. The deemed payment salary and PAYE tax must be accounted for before dividends are declared, since dividends come out of post-tax profits. If dividends are paid first, the company could face penalties and have to claw back payments or deal with tax shortfalls. In my advisory practice, I encourage clear payroll scheduling to run deemed payments monthly or quarterly to avoid dividend overpayment, helping contractors maintain a healthy, compliant cash flow.
Q14: Can freelance professionals working inside IR35 still claim the marriage allowance or other personal tax reliefs?
A14: Personal tax reliefs like the marriage allowance are tied to your individual tax return and taxable income. When working inside IR35, salary via PAYE is your taxable income, so you can still claim such reliefs personally, just like an employee. However, personal allowance cannot offset company profits taxed through corporation tax, so the benefits apply only to you personally. I had a client in Cardiff benefit unexpectedly by transferring his marriage allowance allowance, reducing his effective PAYE tax inside IR35 a little.
Q15: How does having multiple contracts inside IR35 with different clients affect payroll and tax balancing?
A15: Managing payroll for multiple contracts inside IR35 can be tricky, especially if contracts run concurrently or intermittently. Each contract’s deemed payment must be calculated separately but paid through your company’s payroll cumulatively. For example, a digital marketer in Birmingham juggling three inside IR35 contracts found their monthly payroll slightly underestimated NICs because they handled contracts separately. Consolidating income and running payroll on total income prevents NIC underpayments and ensures HMRC is satisfied.
Q16: What’s the impact of remote working from outside the UK on IR35 inside limited company contracts?
A16: Remote working abroad raises complex questions. The IR35 test applies if your services are effectively “disguised employment” for a UK client. If you live outside the UK, your tax residence and the limited company’s UK tax status could shift. For instance, a contractor working from Spain year-round with a UK client inside IR35 may face UK PAYE tax but also foreign tax obligations. The key here is to seek tailored advice, as it may significantly alter payroll and reporting responsibilities.
About The Author:
Adil Akhtar, ACMA, CGMA, CEO and Chief Accountant of Pro Tax Accountant, is an esteemed tax blog writer with over 10 years of expertise in navigating complex tax matters. For more than three years, his insightful blogs have empowered UK taxpayers with clear, actionable advice. Leading Advantax Accountants as well, Adil blends technical prowess with a passion for demystifying finance, cementing his reputation as a trusted authority in tax education.
Email: adilacma@icloud.com
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