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        Updated: May 29, 2024

        IR35 Tax Rules and Pensions

        It's vital all medium to large businesses understand the IR35 tax rules for pensions. This in-depth guide provides all the guidance you'll need.

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        We can help! We know everyone's circumstances are different, that's why we work with brokers who are experts in pensions. Ask us a question and we'll get the best expert to help.

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        From April 6 2020, public authorities and all medium and large private businesses will have responsibility for deciding the employment status of their workers, rather than workers holding the responsibility to choose.

        You could be affected by IR35 tax legislation, if you are a business, or work as a self-employed contractor for a business that meets at least two of the following criteria:

        • Has an annual turnover in excess of £10.2 million
        • The balance sheet totals more than £5.1 million
        • There are over 50 employees

        What is IR35?

        The IR35 tax legislation was introduced in April 2000 to ensure employed and self-employed people pay similar amounts of tax. This commonly occurs by using an intermediary such as a limited company, when the person would normally be considered an employee. The legislation has been criticised for being poorly conceived, overly complex and open to interpretation.

        The legislation has also been accused of causing unwarranted costs and hardships for genuine businesses, especially self-employed and contractor workers. HMRC can consider such people to be ‘deemed employees’. If caught by IR35, they have to pay income tax and National Insurance Contributions as if they were on PAYE salaries, which can have a significant impact on net income.

        The government is currently replacing the current IR35 legislation with a new ‘Off Payroll Tax’. This was first introduced into the public sector in April 2017 and will be rolled out to the private sector from April 2020.

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        How much extra tax is it if I fall inside the rules?

        How much extra tax you have to pay will depend on your income. Relevant engagements caught by IR35 regulations have a 5% deduction allowance, which is a flat rate charged for administration expenses and other allowable expenses. After this flat rate allowance, the remaining bulk of your income will be ‘deemed salary’ and taxed as income at the usual levels.

        Income will be taxed at the same levels as a regular employee. You could, however, benefit from working through a limited company. For example, through schemes such as the Flat Rate VAT Scheme.

        You can find more details about how to calculate your deemed salary inside the IR35 rules on the HMRC website.

        What if I fall outside the rules?

        Falling outside IR35 is good news and means you can continue your business as usual. You’re deemed to be operating a genuine business, can pay yourself a salary and pay your taxes in the usual way with no need to concern yourself about the IR35 legislation. You may need to reassess IR35 again if your circumstances change in the future.

        IR35 and pension contributions

        Contributing to a pension plan if you’re self-employed is generally recommended and, if you fall inside the IR35 regulations, you could use pension contributions to off-set the amount of tax you have to pay. Additional tax along with your National Insurance Contributions could increase the tax you pay by 80% and reduce your net salary by as much as 25%.

        By diverting a percentage of your gross fees straight to a pension scheme, you could save on the potential losses. Pension rules allow tax relief on contributions up to £40,000 per annum and could prevent your income being taxed in accordance with the IR35 legislation.

        Setting things up this way could lead to tax relief of 50%, which may make a massive impact to your pension pot, and the way you handle being caught by the IR35 tax rules.

        IR35 can be tricky to get your head around but we work with experts who understand the tax legislation and how it can affect you. Get in touch for a free, no-obligation chat and we’ll introduce you to one of the independent financial advisors we work with. They will be able to explain how IR35 could affect you and help you make a plan for the way you work and how you’re paid, all of which should help you meet your long-term financial goals.

        Is there a specific pension for IR35 contractors?

        Pension providers were quick to realise the business opportunities brought about by IR35 legislation. This means that there is much marketing targeted at self-employed and contractor workers caught by IR35 legislation. Be cautious about falling for something which sounds like it was made for you. Good marketing is unlikely to result in you getting the best pension.

        There isn’t a specific need to find a pension scheme devised especially for workers who fall under IR35 and you’re more likely to find the best pension returns elsewhere. To find out about all your pension choices, talk to one of the independent financial advisors we work with.

        Speak to an expert

        The independent financial advisors we work with are fully qualified to provide advice and are authorised and regulated by the Financial Conduct Authority. Call 0808 189 0463 or make an online enquiry and we’ll match you with an advisor who is expert in tax and pensions.

        They will be happy to answer all your questions and help you find a pension which is best suited to deliver returns as part of a long-term financial planning strategy, taking all your needs and circumstances into account.

        If you already have a pension, we can also arrange a free pensions review to ensure that your current pension pot is performing as well as you need for the income you wish to have in your retirement.

        Ask a quick question

        We can help! We know everyone's circumstances are different, that's why we work with brokers who are experts in pensions. Ask us a question and we'll get the best expert to help.

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        Richard Angliss

        Finance Expert

        About the author

        Richard Angliss has made a career in financial services which stretches over 40 years.

        His early career was spent learning about the various financial products and applying them to prudent advice, working for one of the largest life assurance and investment firms. After that he joined the financial services arm of a very well-known firm providing independent advice to their 8 million customers.

        For the last 20 years he has been involved in building software solutions that help Advisers and clients work together to achieve good financial outcomes and helping to set up three independent advisory firms. He also has written many articles for financial services publications and provided commentary for newspaper journalists.

        At an early stage in his career he realised the great satisfaction that comes with being able to help people achieve their goals and protect their families. “Regulation of financial services has hugely impacted on ensuring people get appropriate advice. The issue these days is access to that advice and just as importantly regular reviews to make sure that everything stays on track”.

        With the growing development of online resources such as Online Money Advisor he sees a great future for people to access advice to make their pension and investment work harder for them.  Plus, of course, to ensure they have insurance products in place that will be required when unforeseen events happen.

        He knows getting that balance right is crucial to prudent financial planning and the wellbeing of individuals and their families.

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        *Based on our research, the content contained in this article is accurate as of the most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us as well as any of our own are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.

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