Commonly used terms in IR35 and UK contracting explained.
IR35 (Off-Payroll Working Rules)
Legislation designed to assess whether a contractor is genuinely self-employed for a particular engagement or if they are, for tax purposes, an employee of their client (a "disguised employee"). If a contract is deemed "Inside IR35", the contractor is taxed like an employee.
Inside IR35
A determination that a contract falls under the Off-Payroll Working Rules. This means the contractor is treated as an employee for tax purposes, and Income Tax and National Insurance Contributions (NICs) are deducted at source via PAYE, typically through an agency or umbrella company.
Outside IR35
A determination that a contract does not fall under the Off-Payroll Working Rules. This means the contractor is genuinely operating as a self-employed business for that engagement and can typically receive gross payments to their Limited Company, managing their own taxes (Corporation Tax, salary, dividends).
Personal Service Company (PSC)
A Limited Company set up by a contractor, through which they provide their services to clients. The contractor is usually the director and shareholder of the PSC.
Umbrella Company
A company that acts as an employer for contractors working on fixed-term assignments, typically those determined to be Inside IR35. The contractor becomes an employee of the umbrella company, which handles payroll, tax deductions, and NI contributions.
PAYE (Pay As You Earn)
The system used by HMRC to collect Income Tax and National Insurance Contributions from employment income. Deductions are made by the employer before the employee receives their net pay.
National Insurance Contributions (NICs)
Contributions paid by employees, employers, and the self-employed to fund certain state benefits, including the State Pension. There are different classes of NICs.
Dividends
A distribution of a company's post-tax profits to its shareholders. For contractors operating Outside IR35 via a PSC, dividends are a common way to extract profits in a tax-efficient manner, after paying a salary.
Corporation Tax
A tax levied on the profits of limited companies. Contractors operating Outside IR35 through a PSC will pay Corporation Tax on their company's taxable profits.
Status Determination Statement (SDS)
A document that an end-client (medium or large private sector, or any public sector body) must provide to the contractor and the fee-payer, stating whether they consider the contract to be Inside or Outside IR35 and the reasons for that determination. The client must take "reasonable care" in making this assessment.
Reasonable Care
A legal requirement for end-clients when making an IR35 status determination. It means the client must genuinely and thoroughly assess the contractual terms and working practices of the engagement against IR35 criteria.
Fee-Payer
The entity in the contractual chain closest to the contractor's PSC. This is usually the recruitment agency or, if the contractor engages directly with the client, the client themselves. The fee-payer is responsible for deducting tax and NICs if a contract is Inside IR35 (for medium/large private sector clients and public sector).