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Once you determine a contractor’s IR35 status, you can set up automatic tax and NI calculations and process them in your payroll.
IR35, sometimes known as the “off-payroll working rules,” ensure that contractors pay generally the same tax and National Insurance as employees. These rules relate to individuals operating through an intermediary, such as a limited company, to directly provide services to a client.
Off-payroll working rules require medium-to-large sized private companies or public sector organizations to determine whether contractors fall inside or outside of IR35. If you are a small business, the responsibility currently remains with the contractor to determine whether IR35 applies to them. You need to calculate and deduct the appropriate amount of tax and NI contributions for your IR35 workers and process them through your payroll.
Before you begin
To determine whether or not a contractor falls inside or outside of IR35, you can use HRMC’s Check Employment Status for Tax tool.
If a contractor is working Inside IR35, they are considered an employee for tax purposes. You must deduct tax and NI from their pay and report their earnings and deductions to HMRC in your Full Payment Submission. The contractor isn’t entitled to statutory payments, student loan deductions, annual leave, holiday pay, National Living Wage rates, or pension auto-enrollment.
If a contractor is working Outside IR35, they are considered legitimately self-employed and aren’t within the scope of IR35. The contractor is responsible for paying the correct ax and NI contributions.
How to process IR35 workers
- Add the contractor into UK Payroll. For more information, see Add a new hire.
- From the left side bar, navigate to Employees.
- Select the relevant employee.
- In the General tab, mark This employee is an off-payroll worker (IR35).
- Click Save changes.
UK Payroll will calculate the appropriate tax and NI contributions for the IR35 worker and generate a payslip for them. The IR35 worker will also appear on your FPS in line with HMRC guidance.
FAQs
Why do I get an error message after marking the IR35 box?
If the individual has been enrolled into a pension scheme in UK Payroll, you won’t be able to mark them as an IR35 worker. Remove the employee from the pension scheme before marking them as an IR35 worker.
I uploaded pay data into UK Payroll and accidentally included the IR35 worker. Will this affect their pay?
Even though UK Payroll allows pay items to be uploaded for IR35 workers, such as statutory payments and holiday pay, they won’t be included on the contractor’s payslip or in their pay as they aren’t entitled to these payments.
I previously paid a worker as an employee but now need to flag them as an IR35 worker. What should I do?
If you have previously made payments to a worker as an employee and need to change their worker status, contact Support.