A Guide to IR35 Contracting Rules

With so many to choose from, comparing umbrella companies can seem like a hassle. Not with Umbrella Supermarket

Since their introduction in 1999, IR35 contract rules have caused quite the stir among the self-employed contracting community. They were originally intended as a method of clamping down on employees in all but name who set up a limited company to circumvent tax rules and pay a reduced rate. However, IR35 has since evolved into a dragnet into which HMRC can sweep virtually all self-employed contractors and force them to pay a higher rate of tax…

This evolution of IR35 over time has not gone unnoticed by those who have seen their income significantly diminished by HMRC repeatedly moving the goalposts, and the scheme has come under consistent criticism by experts in the industry and contractors alike.

In a bid to make the process more transparent and assuage concerns, HMRC introduced its Check Employment Status for Tax tool (CEST) in 2017, though subsequent controversies surrounding the tool have also rendered it liable to reproach.

As such, can be difficult for self-employed contractors to understand fully the rules surrounding IR35 contracts and whether they themselves are deemed to be “inside IR35”. With that in mind, this handy guide aims to provide a short rundown of the exact regulations, as well as providing advice to those who aren’t certain of how to ensure they maximise their earnings without falling foul of the law.

A short history of IR35

IR35 contract rules were initially introduced just before the turn of the millennium to tackle the rise of people using intermediary limited companies in order to pay a lower rate of tax, while still operating by-and-large as an employee of their end client. Since the client would no longer have to pay national insurance contributions for a contractor, and the contractor themselves could take advantage of the dividends and lower rate of corporate tax afforded to limited companies, it was a win-win arrangement for all involved – except the government.

Aware of the fact that it was missing out on potentially millions of pounds in tax revenue, HMRC introduced IR35 in 1999, which penalised those serving as an employee in all but name. Those found to be manipulating the system were forced to submit to PAYE tax rates, but over the years, the scheme has evolved into something more geared towards maximising the amount of tax paid by legitimate self-employed people, as well.

As of April 2017, HMRC amended the rules surrounding IR35 in the public sector so that the end client was now responsible for determining whether the contractor fell within IR35 contract rules. Wary of penalisation, many of these clients simply blanketed all of their partners as being “inside IR35” or, worse still, ceased trading with them altogether. This meant that thousands of contractors across Britain were left out of pocket. With the rule due to expand to include the private sector in April 2020, the regulations are set to affect countless more people, too.

Implications for self-employed contractors

The impact of these rules has already been felt across the public sector. HMRC stipulates that it judges an individual to be an employee rather than a contractor (and therefore working within an IR35 contract) on the basis of three grounds:

a) control (the amount of control they exert over how, when and where they work

b) substitution (whether they can send a substitute in their place)

c) mutuality of obligation (whether work must be found by the client and accepted by the contractor as part of their arrangement).

From 2020 onwards, self-employed contractors of all stripes will face the very real possibility that HMRC will view IR35 as applicable to their situation. In real terms, this means like contractors are likely to be subject to a 25% increase in the amount of tax they pay, since they will no longer be able to capitalise on lower tax rates and dividend rules contained within the setting up of a limited company.

In this sense, the financial benefits of self-employment will be largely negated, while the risks associated with it will remain. Self-employed individuals have little job security, no pension, no holiday pay, no sick pay and no maternity or paternity leave. It was in recognition of these drawbacks that contractors were encouraged to take advantage of the same breaks afforded to corporate entities through setting up a limited company, as well as serving as an incentive for investing their profits back into the national economy.

Taking shelter under an umbrella

With HMRC taking strides to eliminate most of the financial benefits associated with setting up a limited company and working as a self-employed contractor, one possible solution to the problem could be to contract the services of an umbrella company. These firms “hire” contractors to their payroll and treat them as an employee, bypassing the need for IR35 altogether.

As well as sidestepping all of the stress and anxieties associated with trying to work out whether or not your working relationships are deemed as IR35 contracts or not, umbrella companies also offer plenty of other benefits, too. They can handle all of your invoicing, expenses and tax returns for starters, taking a huge burden off your mind. What’s more, as an “employee”, you’ll receive the same statutory benefits outlined above as the rest of the national workforce does.

In exchange for these services, umbrella companies charge a regular fee (normally payable weekly or monthly). Of course, not all umbrella companies are created equal. Some charge higher rates for more comprehensive packages, some offer discounted fees for a more threadbare service, and some fall somewhere in between the two extremes.

Finding the best umbrella company

With so many to choose from, comparing umbrella companies can seem like a hassle. Not with Umbrella Supermarket. Our umbrella comparison site makes it quick and easy to compare quotes from leading providers, based on your monthly income. Put us to the test today!

Would you like more information on A Guide to IR35 Contracting Rules?

Explore More Resources

Using an Umbrella Calculator

The Pros of Using an Umbrella Calculator

There are many advantages to using an umbrella calculator for contractors.

Umbrella calculators allow you to quickly compare thousands of umbrella companies across the UK, offering a clear overview of what you will receive from the company, including everything from your take-home pay, what benefits you will receive, and what services the company will offer.

To help contractors find out more, Umbrella Supermarket outlines the main benefits to using an umbrella calculator in 2021.

umbrella vs limited

Umbrella vs Limited Company: What to know when making the move this new tax year

The 6th April 2021 marked significant changes to IR35 legislation which impacted thousands of self-employed, limited company contractors operating within the private sector.

In light of the changes that have now rolled out, many limited company contractors are understandably considering their options and thinking about making the move to umbrella this new tax year.

To help make the decision that little bit easier, in this guide Umbrella Supermarket outline what contractors need to know about making the move from limited company to umbrella in 2021, to help you get on the right track.


umbrella company vs paye

Umbrella Company vs PAYE: What should you choose?

Umbrella company vs PAYE is a question asked by thousands of contractors.

After all, it’s a big decision to make that will have a direct impact on your contracting career and day-to-day life, so it’s not one that should be taken lightly.

To help every contractor make the right decision for them, Umbrella Supermarket has put together this insightful guide outlining the key differences between umbrella and PAYE and the advantages and drawbacks of each.

avoid ir35

How can I avoid IR35?

As a contractor, you will most likely know about IR35 and upcoming reforms from April 2021.

These changes to IR35 legislation are set to badly impact many self-employed contractors in the private sector, so thousands are understandably worried. After all, getting caught out by IR35 can mean you end up paying more in tax than you need at the same level as an employee, without receiving the benefits of being employed, such as statutory rights.

umbrella company costs

Umbrella Company Fees: How Much Should You Pay?

When deciding which umbrella company to work with, the fees they charge will inevitably play an important role in the decision-making process.

Umbrella company fees are taken directly out of the contractor’s income, so it is only natural that contractors want to ensure they are getting a fair deal.

To help contractors understand umbrella company fees, from how they are charged, what they will receive in return, and how much they should be paying, Umbrella Supermarket outlines everything there is to know about umbrella fees in this handy guide.

umbrella vs limited

Pros and Cons of Limited vs. Umbrella

Big reforms to IR35 legislation are set to come into motion from 6th April 2021 which will impact the thousands of self-employed, private-sector contractors out there.

For this reason, many of the contractors that currently operate through a limited company will be considering the umbrella company route as an alternative.

If this is true for you, it’s important to do your research to find out whether limited company vs umbrella is the best option for you in 2021.

To help make the decision that little bit easier, in this guide Umbrella Supermarket outline the key differences between limited vs umbrella, so you can get on the right track.

2021 budget

What Does the 2021 Budget Mean for Contractors?

On 3rd March 2021 Chancellor Rishi Sunak unveiled his Budget in the House of Commons, outlining the government’s tax and spending plans for the year ahead.

Sunak announced a variety of measures he will put into place to help businesses and jobs that have suffered through the pandemic, as well as outlining a plan for the long-term recovery of the economy.

However, the question many contractors will be asking is how the Budget will impact the

umbrella company

5 Benefits to Working with an Umbrella Company

Contracting through an umbrella company has become an increasingly popular option for contractors across the UK in recent years. After all, it is a route that offers contractors a range of benefits over other paths such as working through PAYE or being self-employed.



ir35 reforms

Contractor’s Guide to IR35 in 2021

From April 6th 2021, reforms to IR35 legislation will come into force, impacting the lives of thousands of self-employed contractors.

Inevitably, contractors across the UK are concerned about upcoming reforms and how these will affect them. To help, in this guide, Umbrella Supermarket look at what these changes to IR35 entail and how they might impact you as a contractor in 2021.


compare umbrella company fees

How to Compare Umbrella Company Fees

If you are considering joining an umbrella company in 2021, or have been contracting through one for a while and want to ensure you are getting a good deal, it is important that you know how to compare umbrella company fees.

What you pay in income tax and National Insurance will be the same regardless of which umbrella company you choose, however the fees the umbrella company charges can make a big difference to your take home pay.

At Umbrella Supermarket, we know that every contractor wants to get a fair deal. To help, we explain how umbrella company fees work and how you can compare them to find the best deal.

job retention scheme

Job Retention Scheme for Contractors in 2021

The COVID-19 pandemic has impacted workers across the UK and contractors have been no exception.

Many of the 1.77 million independent contractors have either lost work altogether or have had contracts put temporarily on hold leaving them in a tricky position.

Fortunately, many of these contractors are eligible for the government’s Job Retention Scheme otherwise known as furlough, introduced to offer financial support for businesses and workers. This has been an essential source of income for many who have lost contract work as a result of the pandemic.

As we experience a third national lockdown, the furlough scheme has now been extended until the 30th April. So, if you find yourself out of contract work or have projects on hold, Umbrella Supermarket are here to explain what the Job Retention Scheme is, how it works and what this means for contractors.