IR35 Explained

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Why is IR35 Important?

Why is IR35 Important?

IR35 is a piece of legislation introduced in April 2000 which was designed to bring the remuneration of as many contractors' as possible within PAYE and National Insurance, i.e., as opposed to taking dividends.

This was perhaps the biggest change in the last 30 years to the way in which IT contractors organised their financial affairs.

Before the introduction of IR35 http://www.hmrc.gov.uk/ir35 legislation, it was possible to be "paid" in dividends out of a limited company, and those dividends didn't attract NI contributions.

The IR35 legislation defined rules that differentiated between work that could be seen as "true" contract work, (many overlapping clients for short periods of time), and work done by a contractor who was in reality acting as an employee, (one long term client working alongside other employees). Those who were found to be "disguised" employees would then find their contract payments subject to tax and National Insurance and be unable to pay themselves dividends or claim other than minor expenses.

This legislation meant that is was now less attractive to form your own limited company as you would be unable to pay yourself dividends in many normal contract situations.

Umbrella company employees do not receive dividends and so never fall within the IR35 legislation

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