Is Outside IR35 Really Better than Inside?

Introduction

In this article I explore the key differences between Outside and Inside IR35, helping you determine what’s best for your contracting career. Navigating the contracting landscape can be daunting, especially with the complexities of IR35 regulations. 

If you’re new to contracting, it’s difficult to understand whether to opt into an Inside IR35 contract or an Outside IR35 contract.

Whether your goal is to maximise earnings or gain a greater sense of stability, this guide simplifies your decision-making process.

1. Basics of IR35: Inside vs. Outside

At its core, IR35 is a tax legislation designed to combat tax avoidance by contractors who HMRC deems to be ‘disguised employees’—individuals who work in a similar manner to full-time employees but typically bill through limited companies. Here’s a breakdown of the two classifications:

Inside IR35: Being inside IR35 implies that you are considered an employee for tax purposes. This classification subjects you to PAYE (Pay As You Earn), including National Insurance and income tax deductions, akin to traditional employment. This could mean a reduction in your take-home pay but provides a semblance of stability akin to employment, such as qualifying for mortgages more easily due to the stable PAYE documentation.

Things to note here are:

• You’re considered similar to a permanent employee for tax purposes by HMRC.
• Taxes are deducted via PAYE, reducing take-home pay.
• Often involves interim or replacement roles.
• You are paid via an Umbrella company (limited company).

Outside IR35: Contractors Outside IR35 are treated as genuine businesses. This status allows you to pay yourself a salary or dividends, potentially leading to a more tax-efficient setup. You have the autonomy of a business owner, which includes choosing your work hours, taking on multiple clients, and bearing the risks and rewards of business ownership.

Things to note here are:

• You operate as an independent business with greater autonomy.
• Financial risks are higher, but so are potential rewards.
• Ideal for project-based, specialist work.

2. Tax Implications

Operating as an Outside IR35 consultant is tax-efficient because HMRC views you as a business owner. My accountant’s sound advice has always been to retain 35% of earnings in my account for tax purposes, with an additional 10% set aside for dividend taxes. These are rough estimates, and I routinely consult with my accountant to ascertain the maximum permissible withdrawal from my business account.

On the other hand, Inside IR35 status means you’re taxed as an employee, simplifying tax management significantly. Taxes are deducted weekly via PAYE, ensuring you meet tax obligations progressively, without the end-of-year tax burden that typically comes with monthly payment setups. This ensures that your financial planning is more immediate and aligned with your cash flow.

Here are a few things to consider in relation to the two different types of contracting:

Inside IR35:

• PAYE deductions include Income Tax, National Insurance, and possibly pension contributions.
• Your take-home pay is significantly reduced by mandatory contributions.

Outside IR35:

• You can deduct business expenses, pay Corporation Tax on profits, and draw dividends.
• With strategic financial management, your net income can be higher.

3. Employment Rights and Protections

As contractors, you are not protected by employment law, but you are subject to some protections. As an Inside IR35 contractor, see yourself like a temporary worker that can be replaced by a permanent member of staff. Your Umbrella company would need to adhere to certain conditions, as technically the law sees them as your employer. The Conduct regulations of 2003 protect contractors from recruiting agencies and other intermediary companies from taking the biscuit. If you are ever asked if you should opt into the conduct regulations of 2003 as an Inside IR35 contractor, always tick yes. Tick no if you are an Outside IR35 contractor.

Alongside this you may get other perks like holiday pay (included in your pay or can be paid separately based on the hours you’ve worked), discounts, health benefits and pension benefits.

As an Outside IR35 contractor, you have less perks as you are contracting via a business; usually your own limited company. This means you have to set up your own perks. Make sure to have business insurance which covers you for professional indemnity, public liability, IR35 status protection, cybersecurity and others.

Both types of contractor will be covered by general laws such as Health & Safety Laws as well as the Equalities Act.

Here are some things to note: 

Inside IR35:

• Limited perks: no redundancy pay, holiday leave, or sick pay.
• Protected under workplace regulations like health and safety and the Equality Act 2010.

Outside IR35:

• Greater control over your work but no statutory employment benefits.
• You must manage your own insurance and financial risks.

4. Legislative Changes and Market Impact

There have been a lot of changes in the market over the years creating increasingly rapid booms and busts in the contracting market.

Recent global events like Brexit, COVID-19, and fluctuating government policies have created uncertainty. Changes in the global economic markets due to war, energy crises and inflation rates all have an effect.

Your government, their responsiveness and their political views ultimately have a big effect on what opportunities exist in the market. This is why I advocate for having a generalist and a specialist role in threatening or opportunistic times respectively. Contractors must remain agile to adapt to these shifts. You can read more about this here.

5. Navigating Your IR35 Status

You must have a clear way of determining whether you are inside or outside of IR35. Here are some things to consider:

• Do you provide all essential equipment (e.g., laptops, mobile phones) needed for the engagement, rather than relying on the client’s resources?
• Are all consumable costs (e.g., paper, printing) included in your fees, ensuring no additional expenses for the client?
• Do you maintain full autonomy in your work, with control over how, when, and where the work is carried out?
• Are there any instances where the client supervises, directs, or controls your work during the engagement?
• Are your engagements limited to specific projects or deliverables, rather than ongoing or general services?
• Do your agreements include clearly defined deliverables and work packages?
• Do you assume financial risk for the project, including rectifying unsatisfactory work at your own expense?
• Are you free to work with multiple clients concurrently, provided there are no conflicts of interest or confidentiality breaches?

Ensure you assess your situation and consider obtaining IR35 insurance for added protection. If you get your status wrong both you and the client could be fined large sums of money.

6. Strategy for Contractors

To stay relevant you need to do things that make you relevant. Essentially it’s about standing out so that you are an obvious hire. This boils down to a few things:

• Being attractive
• Being efficient

Attractiveness is determined by how you present and articulate your value. This is ensuring you present your personal brand professionally. Begin with determining things like your contracting niche and displaying your experience in the language of your potential clients.

Follow on by having a strong LinkedIn presence, by completing all elements of your profile (you can read more about how to do this here), aligning it to your CV.

You also want to stay ready by having your templates, tech and processes in place beforehand. This includes things like:

• Having a template proposal
• Procuring Microsoft office 365
• Getting tools that capture time keeping and deliverables

All these things become useful when the opportunity presents itself. Also Remember: keep track of your time, deliverables, and client feedback to showcase your value.

Bonus Tip! Advanced Financial Management

These bonus tips are more relevant to the Outside IR35 contractor, and although may be seen as common sense, they are not always known or practiced:

Invest in a knowledgeable, experienced and qualified accountant to manage your tax obligations efficiently. Not only do they manage your taxes, but the knowledge they have will teach you a lot about how to manage your money. You are ultimately responsible for your finances, but a good accountant will make that accountability so much easier.

You should also use business banking apps like TIDE or Starling to receive and make payments. They are versatile and allow your accountant to have limited permissions to help monitor and manage your income and expenditure. 

Finally, you also need to make sure you record any dividends (business bank transfers out of your account for income purposes) you take out to make sure you have enough for taxes. Get this step wrong and you could be liable to owe HMRC huge sums of money.

Key Takeaways

• Inside IR35 offers compliance ease but limits earnings potential and autonomy.
• Outside IR35 provides flexibility and higher earning possibilities but demands careful financial and risk management.
• Success as a contractor requires a strategic approach to branding, planning, and financial management.

Conclusion

So, is Outside IR35 really better than Inside? The answer depends on your lifestyle and career goals, and appetite for risk. While Outside IR35 offers greater autonomy and tax efficiency, it comes with great admin and financial responsibility. Inside IR35, on the other hand, offers stability but with reduced take-home pay. By understanding the nuances of IR35, you can make an informed decision that aligns with your ambitions.

If you are like me and you don’t mind the autonomy that comes with Outside IR35, then it is a clear winner, especially as you are making more. But if you are new to the game, starting off Inside is not a bad shout. The market is scarce with Outside roles at the moment so whatever you get will be a blessing regardless!

If you’re ready to elevate your portfolio career then let’s connect and make your goals a reality!

If you want, I can help you in the following 3 ways: 

• The Life Navigation System: A comprehensive guide on how to manage your life, helping you set goals, set routines and journal like a boss! Comes with a complete walkthrough video and Notion template!  
• Secure the Job: The step-by-step course that unveils systems, strategies and success when it comes to progressing your job and applying for new roles  
• The Independent Consultant UK: A guide to becoming a contractor in the UK. This is a step-by-step walkthrough of my experiences, hosting exclusive information to help you transition into the space of contracting.  
• Book a call: Let’s have a chat to focus on your life areas and where you can have the biggest impact. If it makes sense, we can progress towards procuring coaching or mentoring.