IR35 & Off-Payroll Rules: How They Affect Your Corporation Tax

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.

With £81,295 profit and no associated companies, you're in the marginal relief band (between £50,000 and £250,000). The effective rate after marginal relief works out to roughly 22% — the ~£18,000 reflects that calculation, not a flat 25% on all profits above £50,000.

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.

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
• The deemed salary is a deductible cost for the company, so you may have very little Corporation Tax to pay (most tax already collected via PAYE)

The 5% Allowance — Which IR35 Chapter Applies?

Whether a 5% flat-rate deduction is available depends entirely on which IR35 chapter governs your engagement.

Chapter 10 ITEPA 2003 (off-payroll working rules) — no 5% deduction. For engagements with public sector clients (since April 2017) and medium or large private sector clients (since April 2021), the client or agency determines IR35 status and operates PAYE. Under these rules the 5% deduction is not available — HMRC abolished it for Chapter 10 precisely because tax is collected at source by the client, so the allowance is unnecessary. Claiming it on a CT600 for a Chapter 10 engagement would be an improper deduction.

Chapter 8 ITEPA 2003 (PSC determines own status) — 5% deduction available. Where your client is a small company (not subject to the off-payroll rules) and your own personal service company is responsible for determining IR35 status, the 5% allowance remains in place. You can deduct 5% of the gross fee income as a proxy for the administrative costs of running the limited company (accountancy, insurance, admin). This only applies when you, not the client, are making the IR35 determination.

In practice, most contractors working with medium or large businesses are now under Chapter 10, so the 5% route is unavailable for most engagements.

Common IR35 Issues on CT600

1. Double taxation — if the client deducted tax but you also pay CT on the same income, you're double-taxed. The deemed salary payment should be included as a deductible cost in the company's tax computation, which eliminates most of the CT liability.
2. Expenses — you can still claim legitimate business expenses even inside IR35
3. 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.