What is the IR35 rule for freelancers in the UK?

What is the IR35 rule? 

The IR35 legislation, enacted in 2000 by Her Majesty’s Revenue and Customs (HMRC), targets UK tax measures aimed at combating disguised employment. This legislation addresses individuals working like employees but through their own companies, potentially leading to reduced tax payments. Significant reforms were introduced in the public sector in 2017 and expanded to the private sector in April 2021 (initially scheduled for 2020 but postponed due to the COVID-19 pandemic). The IR35 is a British law, therefore, it only affects self-employed workers (freelancers) and companies in the United Kingdom, as well as the taxes and duties arising from their activities.

IR35 seeks to identify workers who, while formally registered as ‘self-employed’ or ‘contractors’, effectively operate as employees, thus avoiding the corresponding income tax and National Insurance Contributions (NICs). The legislation was a response to a trend where workers would leave permanent employment only to return to similar roles as contractors soon after, benefiting from lower taxes and other financial advantages not intended for genuine freelancers.

Does the IR35 apply to my situation?

It’s up to freelancers and contractors to make sure they fall into the right category and pay the taxes that apply to their line of work. Here is additional information to help you understand which category you may fall into.

How do you determine your profile and status: employee vs contractor ?

In some cases, the boundaries can be blurry and an independent contractor can ask the question: how do I situate myself in relation to the IR35 rule? Am I in good standing?

A simple way to summarise the situation is to ask yourself: am I employed by my company (with the status and benefits that go with it, with taxes and duties being withheld at the source)? Or, do I work for the client – or even an intermediary service company – with the appropriate contract (I declare my income myself and pay the appropriate taxes)?

It is therefore necessary to distinguish between an “employee” (an employee with a work contract, aka a “permanent contract”) and a “contractor” (“self-employed”). The “contractor” is an independent person who works for their client for a defined period of time and on one or more specific projects. As a general rule, these “contractors,” chosen for their skills and knowledge, have a service contract stipulating the nature of their assignment.

I am a freelancer in the UK, am I impacted ?

Two scenarios arise for freelancers in the United Kingdom:

To be “inside” the IR35 rule: i.e. to be considered by the HMRC as a sole employee of a company (full-time). In this case, you have more than a chance of being considered inside the rule and therefore have to move towards a PAYE (Pay As You Earn) tax model. You pay taxes in the same way a permanent employee would pay and it is your employer who takes care of everything.

To be “outside” of the IR35 rule: means to be working legitimately as an entrepreneur or freelancer in England and being paid by your client directly. In this case, you have the responsibility to make sure that you pay the correct amount of tax on the money you collect for your work. You are not subject to the PAYE payslip regime. Check our article Inside IR35 vs. Outside IR35: Meaning, Calculator, and Updates to have a deeper understanding of the two scenarios.

Do you have any doubts about your situation? Please do not hesitate to contact us so that we can provide you with a personalised response.

How to become a freelance in the United Kingdom and get support?

When you’ve decided to take the plunge and start freelancing in the UK, you need to start with the mandatory legal steps. Let’s look at this in greater detail.

How do you become a freelancer in the UK ? The procedures

The first step, when you want to work in the UK, whether fully employed or freelancing, is to obtain your National Insurance Number (NIN). The first contact is by phone: an agent will ask you a few questions (you can find the phone number directly on the official gov.co.uk website) and then provide you with an appointment date in order to obtain your NIN.

Once obtained, you will need to register with HMRC and declare your “self-employment” activity.

You will then have to provide some information: name and surname, date of birth, telephone number, postal address, start date of your work, the sector, your NIN, and finally if you are starting the work alone or with a partner. You can find the complete procedure on the official website: gov.co.uk.

It is advisable to do this, at the latest, after you find your first customer (who may ask for your Unique Taxpayer Reference (UTR) number). The important thing to do is to have validated your registration file before the end of the first year of your work.

What are the available supports ?

In order to facilitate the procedures with their clients, the freelancer can also be accompanied by an umbrella company. You then become employed by the umbrella company, while also retaining your freedom as a self-employed person.

Through this, it is then possible to benefit from all the advantages of self-employment, but without the administrative or legal constraints! The umbrella company takes care of everything and pays you via payslips (the PAYE system); you just have to focus on your assignment. This model is especially ideal for foreigners and expatriates since the umbrella company takes care of all the local legislation and administration.

As an alternative to the umbrella companies in England, Hightekers has the advantage of partnering with many Europeans looking to work in the UK. It is a genuine network available to you, as well as provides tax security. However, these are not the only advantages: a secure environment, associate status, international opportunities, contract and invoice management, high-end services available (company car, mutual insurance company, etc.) , and so many others.

There’s no need to worry about the contractual part with the customer or even negotiate an hourly rate. It’s a savings of time and energy, as well as a genuine international freedom as a freelancer in England.