IR35 is awful. Here’s what you can and can’t do about it (Opinion piece)

There’s no point sugar coating it. If you can avoid contracting inside IR35, consider yourself lucky. 

As a finance editor for many years, working at The Economist Group, Wall Street & Technology and for Money Dashboard, I have often written about personal and corporate financial issues and regulations. Usually, there is a silver lining. But when it comes to IR35, my research, personal experience and second hand experiences have left me baffled. 

In the years and months leading up to the reforms, IR35 has been widely described as a tax nightmare. And many businesses have shared fears of a mass exodus of their contractors. I find the reality to be little different. 

If you’re a freelancer or contractor new to IR35, or considering a contract job inside IR35, you’re probably wondering how bad it really is, and how to make the best of it. So here’s some of what I’ve learned to embrace about IR35, and some advice to lessen the blow. 

What is IR35?

IR35 is the private sector payroll reform dreaded by UK’s five million contractors, self-employed and freelancers. 

For many, it will mean working the same contract job (or taking on a new one) for a lower take home pay and no extra benefits while often paying an intermediary company a fee for the pleasure. 

Some background

Employers pay the government national insurance contributions on top of their salaried employees’ earnings and benefits. They don’t do this for their contractors. 

However many companies use freelancers and contractors who act as employees in all but name (and tax status). Inevitably, regulators started to realise they weren’t collecting their fair share of taxes. 

IR35 changes

First drafted in the late 1990’s, IR35 was largely ignored until 2017 when the government turned its eye to the growing freelance and self-employed workforce. 

At a high level, the new reform mandates that contractors who function like direct employees be reclassified as “employees”. This can happen in two main ways. 

The first option is that the hiring company reclassifies the contractor as a direct employee. So the business bites the bullet and pays the national contributions. This entitles the worker to the benefits of fellow salaried workers. 

Or, more common, the contractor reclassifies as an “inside IR35” contractor. This means the contractor becomes an employee of an intermediary company. The hiring company will pay the intermediary, which deducts both income taxes and employer taxes before paying the contractor. But the worker is not likely to access typical payroll benefits associated with employee status, such as holiday pay, sick pay, bank holiday pay, maternity/paternity leave or company pension contributions.

In other words, one way or another these contractors are taxed like an employee. But for the many people in the second category – inside IR35 – there is no benefits upside. 

For the average contractor this IR35 reclassification is a financial blow. Take home pay plummets by an average of 20%

According to the HMRC, around 90% of all private contractors will be moved to “inside IR35” status and classified as employees. 

When does it begin? IR35 delay

Public sector contractors were the first to be caught by IR35 reform in 2017. And soon, the private sector will have no choice but to follow suit. 

One small silver lining to the Covid-19 pandemic pandemonium is that IR35 in the private sector has been delayed one year, from April 2020 to April 2021. 

Am I inside IR35?

It is better to be outside IR35, but this decision is out of your hands. Employers’ hiring contractors are responsible for determining if a position is inside IR35 or outside. If you are inside, you are subject to the new tax rules.  

You can try to dispute the status, but the government has threatened heavy penalties for incorrect determinations, so many firms are playing it safe. Contractors are being placed “inside” by default just to avoid problems down the road. 

However, IR35 only applies to medium and large companies (£10.2mil in turnover or more than 50 employees), so small start-ups might be exempt.


Say goodbye to expensing as you know it. When inside IR35, you cannot claim everyday expenses like travel, mileage, hotels, and meals.

Contractors inside IR35 have historically been entitled to a 5% allowance to account for business expenses. This will be removed with the IR35 reform. 

Using umbrella companies

If your contract falls under IR35 you may need to use an umbrella company as an intermediary. These companies act as a third party employer for fixed-term contracts. They organise the payment between the hiring company and the end contractor, ensuring all taxes are deducted and paid. 

When you sign up with an umbrella company, you sign an employment contract and become their “employee”. So you are technically no longer a self-employed contractor. You are then entitled to the bare minimum of rights as an employee. But when it comes to employee benefits, don’t hold your breath. 

Although you can usually choose to defer portions of your income to “repay” yourself if the future as sick or holiday pay days so it doesn’t feel so bad.

Shop around for umbrella companies

If you can’t get out of IR35, you have my sympathies. But onwards and upwards.

If you need to use an umbrella company, there are many options for contractors inside IR35. It can be hard to spot the differences between them. But this is your hard earned money, so be ruthless about which umbrella companies you choose. 

If they are doing their job by the book, there shouldn’t be a significant difference between final paycheques no matter which company you go with. But there are a few important things to look out for: 

Weekly/monthly fees.

Ask each company what they charge per period for their services (this could be more than £20 of your money per week). Ask for a discounted fee or if they will waive the fee for the first few weeks or months. Ask to speak to their manager if your contact is unsure.

Don’t be too swayed by pay examples. 

The big question is “how much tax do I pay inside IR35?” To help answer, each prospective umbrella company you approach will send a “pay projection” using basic assumptions of your income. This helps you track how your gross income gets whittled down by umbrella margins, employer costs and employee costs.

Obviously your eyes will gravitate towards the final take-home pay figure at the bottom. But look up – are these projections based on four 5-day workweeks per month? Or 21.667 workdays per month (a more realistic average) – differences like these can make one projection look like a better deal than it is. So do a critical comparison. 


Examine and compare the pensions, discounts, and any other perks that umbrella companies offer to their IR35 employees. The differences may sway your preference. 

Pensions reduce taxes

Everyone should be paying into a pension. Fortunately the money can be contributed to a pension from your gross income before the IR35 taxes are applied, lessening your tax burden

You can divert as much as £40,000 of your gross income to pensions per year, which will not be taxed as income. 

The pre-tax pension contributions can be arranged with your intermediary company. Both public and private sector contractors inside IR35 can claim tax relief on pension contributions.

You can still have a side hustle

Being inside IR35 won’t prevent you from taking on other outside IR35 contract jobs and freelance gigs in your own time. Just be sure to let your intermediary know that the IR35 contract is not your only source of income so they can code your taxes appropriately. 

Use an IR35 tax calculator

You can try to calculate your IR35 taxes and take home pay inside IR35 using the IR35 tax calculator on the HMRC website, or the calculator here

To see if the inside IR35 contract is worth your while, compare the reduced salary to your average expenses using Money Dashboard’s free personal finance tools, which help you track spending, budgets and financial goals. 

Good luck.

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