I am subject to IR35 rules. Am I an “employee” or a “worker”?
The special “IR35″ rules apply in particular to an individual or individuals who set themselves up as a limited company (an “intermediary” or “personal service company (PSC)) and supply themselves to work for clients personally under a contract between the client and the intermediary. The individuals are, therefore, directors of their companies, not self-employed. The object of this legal arrangement is to reduce the amount of income tax and Class 1 National Insurance contributions (NICs) paid by the individual. It is common for a salary to be paid that is set at the National Minimum Wage and for the remainder of the company’s profits to be drawn as dividends. Dividends are taxed at lower rates than employment income and is not liable for NICs.
If the individual’s company is a PSC, the complex IR35 rules require you, the director, must make an employment status decision. (See What is the difference between a “contract of service” and a “contract for services”?) You must to consider the terms of the contract with each client and decide whether, if the contract had instead been between the client and you personally, the client would have had to have treated you as an employee and put you on the payroll. If so, you are required to treat the payments from the contract, after certain deductions, as earnings that are subject in full to PAYE tax and Class 1 NICs. These deductions should properly be deducted throughout the year. However, if that is not done, it must be done as a single exercise at the end of the tax year. You can offset the tax and NICs that you have already paid during the year. The effect is that you end up paying as much tax and NICs as you would have done if you had been on the client’s payroll.
As you are a director, an “office holder”, of your company, you are not also an employee unless you issue yourself with a contract of employment, spelling out the terms of your employment. If you have such a contract of employment, you are both an “employee” and a “worker” and entitled in full to all employment rights.
More FAQs Related to Employment Status – Employed or Self-employed?
What is the difference between a “contract of service” and a “contract for services”?
Who are “employees” for payroll purposes?
I am self-employed. Am I entitled to holiday pay or any other benefits from my client?
I am a company director. Am I an “employee” or a “worker”?
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I am self-employed. Why does my client insist on putting me on the payroll?
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