IR35 is a section of tax legislation that was announced in 1999 and took full effect in April 2000. The legislation means that the revenue can tax some contractors as though they are employees of their clients. In turn this means that contractors caught by IR35 pay considerably more tax dropping their take home pay by as much as 25% although to work this out accurately one would need an IR35 calculator; many examples of which can be found online at the official HM revenue & customs site.

The government introduced the IR35, and thus the need for IR35 calculators, in order to deal with tax and National Insurance avoidance schemes through the use of intermediaries, such as Partnerships or Personal Services Companies. The Revenue’s observation was that a great number of IT Consultants, Engineers, non-executive directors and “one man band companies” were frequently regarded as self-employed when actually they should have been treated as employees of the end Client. This was based on the terms and conditions that the Contractors worked under. The Revenue disputed that if the agency or the PSC were separated, a large number of contractors would actually be “disguised employees” who ought to be included on the client payroll and have tax and NIC deducted each month

Not all contractors are actually covered by the IR35. In fact it is estimated that about 20 percent are definitely caught by it, 20 percent are definitely not part of it and the other 60 percent fall into a nebulous area that is neither black or white. If you do fall into the area then it is well worth checking out an IR35 calculator to see how much you could be saving.

A contractor caught by IR35 will usually collect 20% less in their pay packet every month as opposed to a contractor who falls outside IR35. For a contractor on £40 per hour this equates to around £800 per month. So take a look at a IR35 calculator; it could save you a lot of money.