IR35 & Off-Payroll Rules: How They Affect Your Corporation Tax
If you're a contractor working through a limited company, IR35 directly affects how much Corporation Tax you pay. Here's what you need to know.
What Is IR35?
IR35 determines whether a contractor is effectively an employee of their client. If your contract is inside IR35, you must pay tax as if you were employed — even though you work through a limited company.
Inside vs Outside IR35
Outside IR35 (Your Company Keeps More)
Your company invoices the client. You choose how to pay yourself — typically a mix of salary and dividends. Corporation Tax is paid on company profits.
| Item | Amount |
|---|---|
| Contract income | £100,000 |
| Salary (£12,570) | (£12,570) |
| Employer NIC | (£1,135) |
| Other expenses | (£5,000) |
| Corporation Tax profit | £81,295 |
| Corporation Tax (25% over £50k) | ~£18,000 |
| Remaining for dividends | ~£63,295 |
Inside IR35 (Deemed Employment)
If inside IR35, the client (or agency) deducts PAYE and NIC before paying your company. Your company receives much less.
Since April 2021 (public sector from April 2017), medium and large clients determine IR35 status and deduct tax at source.
| Item | Amount |
|---|---|
| Contract income | £100,000 |
| Deemed PAYE + NIC deducted by client | ~£38,000 |
| Your company receives | ~£62,000 |
| Company expenses still deductible | Yes |
CT600 Impact
Outside IR35
- Report full contract income as turnover (Box 145)
- Deduct salary, expenses, pension contributions
- Pay Corporation Tax on the profit
- Take remaining profits as dividends
Inside IR35
- Client deducts tax at source
- Your company receives the net amount
- This is still company income — report it
- You may have very little Corporation Tax to pay (most tax already collected)
- You can still claim a 5% flat-rate deduction for running costs
The 5% Allowance
For inside-IR35 contracts, your company can deduct 5% of the gross payment as a flat-rate deduction for costs of running the company (admin, insurance, accountancy, etc.).
Common IR35 Issues on CT600
- Double taxation — if the client deducted tax but you also pay CT on the same income, you're double-taxed. The deemed payment should be included as a deductible cost.
- Expenses — you can still claim legitimate business expenses even inside IR35
- Multiple contracts — some inside, some outside — account for each separately
Determining IR35 Status
For medium/large clients, the client determines your status using HMRC's CEST tool. You should:
- Get the determination in writing
- Challenge it if you disagree (provide your own assessment)
- Keep records of working practices
For small clients, you determine your own status.
Filing your contractor company's CT600? Use Taxpipe — £59, we handle the tax computation whether you're inside or outside IR35.