Starting Work Inside IR35

Before you Sign a Contract

  • Have the contract checked over by a legal professional and make sure it's fair and doesn't commit you to do things you're not happy to do
  • Check the rate being offered
  • Either find an umbrella company or obtain the preferred ones from your future employer (or get the details of the agency you'll be working through)
  • Ask the agency or umbrella for a Key Information Document (KID). This should tell you exactly what the rate is, what deductions there are and what you'll be paid.
  • Find out how holiday pay will be paid to you. As an inside IR35 worker, you accrue holiday pay as you work, just like a normal employee.
  • If you expect to incur expenses, how will these be paid to you? (bear in mind that most expenses just won't be counted - most likely only things you buy for your client would be applicable)

Your KID document should describe the tax and other deductions that will be taken from your rate. There are some example templates to give you some idea what to expect.

Your tax deductions should be in-line with current tax law. There is no legal way for them to be anything else. The rules are briefly:

  • Everybody has a tax free allowance of £12,500
  • Income tax of 20% is then due on earnings between £12,501 & £50,000
  • 40% is due on the next £50,001 to £150,000
  • Above that is taxed at 45%

(source)

If your deductions are not inline with these rules then either the KID is incorrect, or there are some unlawful deductions or fraud taking place.

Some contracts may require you sign a Non-Disclosure Agreement (NDA) for the work you're going to be doing. You should consult legal advice if this is right for you. However, you should probably NOT sign an NDA that covers the rate, deductions, payroll, agency or umbrella in any way. Doing so will prevent you from being able to use legal means to correct any problems that may occur in future (and of course will prevent you talking about problems too!).

Check your Agency or Umbrella

Until such time as the government regulate or control agencies and umbrellas, there may be some unscrupulous ones in the market place. These present problems for the good umbrellas and agencies, but worst of all can leave contractors with life-changing bills in the future.

You should perform "due diligence" on whomever is going to be providing the payment services that ultimately get you your money. This is sadly not an easy task, but failing to do it may expose you to tax fraud - for which you'll be liable, even if you're not aware it is happening.

Due diligence is advisable, even if the umbrella or agency was:

  • Recommended to you by a trusted friend or colleague
  • Recommended by a large, reputable organisation (perhaps your future client)
  • Used by you (or others) before, perhaps even for years

A fraudulent umbrella or agency may entice you with ways that they can reduce your tax bill, although they may also explain that (quite correctly) there is no way to reduce the tax you pay inside IR35. They then go on to keep the tax they should be paying to HMRC on your behalf for themselves. Even though you had no knowledge of it, or indeed any way to prevent them performing this fraud, you remain liable for that tax and will ultimately receive a (probably very large) bill from HMRC.

The only way to avoid this problem is to perform due diligence.

Since due diligence is a big subject, we've written it up in a separate document: Payer Due Diligence.

Also see Help! My Tax Isn't Being Paid.

Open an HMRC Online Tax Account

If you don't have one already, open an HMRC online tax account.

Once you have one, log on and ensure you can see your previous taxes paid and if anything is currently due. You will need to use this service to ensure that tax is being paid into your HMRC "account" on your behalf throughout your inside-IR35 contract.

Once you Start Work

Once you start work, you can look forward to your first pay day. You should receive a pay slip from your agency/umbrella. This should have at least the following on it:

  • your earnings before and after any deductions
  • the amount of any deductions that may change each time you’re paid, for example tax and National Insurance
  • the number of hours/days you worked, if your pay varies depending on time worked

(source)

Once your pay has actually arrived in your personal bank account, then you should check that it is the correct amount. You should then go on to check your HMRC tax account to make sure the tax that has been deducted has been paid to HMRC (note: HMRC should only receive tax deductions - other deductions may also exist but won't go to HMRC).

You should also check the deductions against the KID you were provided with before signing the contract. These deductions should match the KID document (and of course should be in-line with current tax rates).

If any of the deductions are incorrect, or HMRC are not receiving the tax that they should be, you should seek help immediately.

Also see Help! My Tax Isn't Being Paid.

You should also check the mathematics on your payslip. Make sure that the gross minus the deductions shown actually equals the net amount paid to you (some umbrella companies perform this calculation incorrectly so they can keep more of your money for themselves).

Unfortunately, as explained in Payer Due Diligence, you should check every pay slip, payment, deduction and tax payment. Any agency or umbrella may become fraudulent at any time in the future, no matter how good they appeared to be during your initial due diligence. You may want to consider repeating due diligence at regular intervals (eg. annually) as well, as an "early warning" if something does look to be going wrong.