Outside IR35 Checklist
This outside IR35 checklist is for those contractors who have managed to avoid the off-payroll working rules. It is designed to provide an easily replicable process you can follow to ensure you have the best possible chance of success.
Don’t be put off by how many steps there are or how confusing some may seem at first, an accountant can help you with most of the below.
Find A Contract
Our contract jobs page sources the best contract roles as soon as they’re available. You can filter the jobs search by ‘Outside IR35 Only’, and if you create a profile, our skills-based matching algorithm will provide targeted job recommendations.
If you can’t find a contract role through our website, my best advice would be to reach out directly to relevant recruiters via LinkedIn.
When I apply for a contract job (whether on an agency’s website or a third-party platform like LinkedIn), I always try to identify the contact details of the recruiter responsible for that position. I’ll then contact them to introduce myself and ask if they’re available to discuss the role. If I can’t find the recruiter’s direct contact number but know their name, I’ll try calling the recruitment agency’s general number and then asking to be put through to the relevant contact.
Doing this puts you at the forefront of the recruiter’s mind and makes your profile stand out. After all, contracting is highly competitive, and you need every advantage you can get when you are one of dozens, if not hundreds, that applied.
To further make your profile stand out, tailor your CV to the specific role you’re applying for. Although time-consuming, you should adjust your CV to highlight previous projects and specific experiences that are directly relevant.
It has always been the case that a well-structured and tailored CV will have a better chance of securing an interview than a generalised one, and this is particularly important for contractors given the specialised nature of most jobs.
You may find it helpful to create a few ‘template’ versions of your CV, each tailored to the different types of contract jobs you are qualified for.
Perform IR35 Assessment
The decision-maker responsible for the SDS is also the party responsible for the additional tax liabilities, interest payments and penalties should the assessment be wrong.
The responsibility for performing an IR35 assessment lies with the contractor if:
- The client is in the private sector and classified as a small company (i.e. does not meet the definition of medium or large); or
- The client is classified as ‘wholly overseas’ with no UK presence.
QDOS Contractors offer a comprehensive contract review, and the cost is an allowable business expense that can be offset against your corporation tax liabilities. For further details, see our guides on IR35 Assessments and IR35, Foreign Companies and Overseas Contractors.
If the client doesn’t meet the above requirements, the responsibility for conducting the status assessment lies with the end client/fee payer.
Register Limited Company
Due to potential tax liability issues, most employers will refuse to work with contractors that operate as sole traders. As such, if you want to work outside IR35 contracts, you’ll need to work through a limited company.
One of the most common questions we’re asked is whether it is necessary to incorporate a limited company, set up a bank account, take out insurance, etc, before finding your first contract. Our answer is always no; it is not necessary.
Becoming a limited company director comes with statutory reporting requirements and can incur ongoing accountancy fees. There is no point in starting this process until you have sourced an outside IR35 contract and are confident a limited company will be required. After all, your first contract could be inside IR35, meaning you work through an umbrella company.
i) Incorporation
You can register a limited company through HMRC’s website. It’s relatively easy to do, costs £12, and your company is usually registered within 24 to 48 hours. You can also choose to use a company formation service; simply Google “company incorporation services”, and a range of options will come up. Depending on the services offered, these can cost anywhere between £20 and £100.
Upon registration, you’ll be given a Government Gateway ID, password and a company Unique Taxpayer Reference (UTR). The UTR is sent by post and can take up to 14 days to arrive.
ii) Corporation Tax
Unlike VAT and PAYE, signing up for Corporation Tax is compulsory, and you must register within three months of starting to trade.
Sign in to your business tax account to register for Corporation Tax. You’ll need your company’s Government Gateway user ID and password to sign in and the UTR provided upon incorporation.
When registering, you’ll need to tell HMRC when you started to trade, which will dictate your accounting period for corporation tax purposes. HMRC will then provide you with the deadline for paying corporation tax.
iii) VAT
As a newly incorporated limited company, you must register for VAT if you expect your turnover to exceed £90,000 in the next 30 days. It’s important to note that turnover is different to taxable income. If you expect to be billing more than £90,000 over the coming year, you should register for VAT.
There are two VAT schemes you can choose from:
- Flat Rate: You pay a fixed VAT rate to HMRC and keep the difference between what you charge your clients and what you pay. You cannot reclaim the VAT on your purchases.
- Standard: You charge clients 20% VAT on all invoices and reclaim 20% on all purchases
See our guide to Limited Company Taxes for further details.
iv) PAYE
You must register as an employer with HMRC if you intend to employ and pay staff (even if the only salary you’ll be paying is your own). You can register as an employer here.
If you decide to run the payroll process yourself instead of using an accountant, you’ll need to complete specific tasks before you can pay your employees or yourself. HMRC provide a list here.
Our Ultimate Guide to Limited Companies outlines everything you need to know about being a limited company director.
Register For Self-Assessment
If you intend to pay a dividend, you must register for self-assessment. Self-assessment is the system HMRC use to collect individual taxes owed that are not taxed at source (e.g via PAYE).
As the dividend tax rate is lower than the income tax rate for equivalent income thresholds, most outside IR35 contractors choose to pay themselves a combination of salary and dividends. You must register for self-assessment if you decide to follow in their footsteps.
You register for self-assessment via the Government Gateway platform. HMRC will then create an account for you, and you’ll receive your own Unique Taxpayer Reference. This is different to the limited company’s UTR received earlier.
You’ll also receive a letter with an activation code. Once you activate your account, you can file a self-assessment return any time before the deadline of 31st January following the previous tax year-end of 05th April.
Set Up A Bank Account
If you’re a contractor who has recently incorporated a limited company, you must open a business bank account before you start trading and making/receiving payments. It is a legal requirement for the company to have its own bank account; it can’t be registered in your name.
As a limited company contractor, one of the ‘challenger’ banks like Starling, Monzo, Tide or Mettle could be the way to go. They offer free accounts, payment notifications, integration with accounting tools like Xero and are known for their fantastic customer service.
I have personally been using Starling for my business banking for the past three years and can thoroughly recommend them. The app is simple and intuitive, and every time I’ve had an issue, they’ve been quick to respond.
Read our guide to limited company bank accounts for more information.
Hire An Accountant
Although it is not a legal requirement to employ an accountant, doing so will save you countless hours of administrative burden and simplify running your limited company. An accountant can help you with steps (3) and (4) above. They will set up your limited company and register for all personal and business taxes.
Read our guide to Limited Company Accountants for further information regarding the benefits an accountant can bring to your business and the usual costs involved, and help decide which company to go with.
Not only will an accountant help with ongoing administration, they will usually help with company incorporation and tax registration if asked.
Source Accounting Software
Accounting software facilitates the maintenance of appropriate financial records (receipts, payments, salaries, etc.) and simplifies invoicing. Most contractor accountants provide access to off-the-shelf software or have their own bespoke accounting portals.
Accounting software providers love to tout their uniqueness; however, most are incredibly similar. They usually include invoice creation, bank feed integration, VAT and payroll, and simplified tax return filings.
FreeAgent is one of the most popular choices for contractors (and is free with a Mettle bank account).
Take Out Insurance
You must take out employer’s liability insurance if you have employees. That said, you are exempt as a contractor if you are the director of your limited company, are the sole employee and own more than 50% of the shares.
Although not legally required, most outside IR35 contracts will stipulate a certain level of necessary professional indemnity insurance. Professional indemnity insurance covers where a mistake in your services causes a third-party financial loss.
Most large insurance providers will provide policies catering to the contractor and freelance workforce; however, you may be best going through a specialist such as Qdos. Read our limited company insurance guide for more information.
Consider IPSE Membership
While not a necessity, you may want to consider becoming an IPSE member. IPSE is a community that supports the self-employed with advice, contract reviews and other membership benefits. They release news updates, host regular events, and their ‘Plus’ membership includes a range of insurances.
Costs range from £99 per year for the Essential plan to £350 per year for Plus.
Record Work Performed
Once you have begun working for your client, I recommend keeping a record of your work. If you are paid by the hour, record what you have done every hour. If you are paid by the day, do it daily. Unless the client asks for a timesheet, the records don’t have to be hugely detailed. They can briefly describe the work performed, who you spoke to, any emails sent, etc.
Keeping a record will be of immense help should the client ever have a problem with one of your invoices and query the time you are billing them for. You can look at your records and explain what you were working on. Although not strictly necessary, it can make your life easier if challenged.
Invoice The Client
HMRC states that invoices must include:
- a unique identification number
- your company name, address and contact information
- the company name and address of the customer you’re invoicing
- a clear description of what you’re charging for
- the date the goods or service were provided (supply date)
- the date of the invoice
- he amount(s) being charged
- VAT amount if applicable
- the total amount owed
Most accounting software and some business banking applications will have an invoicing feature that lets you populate template invoices. As an example, here is Starling’s. These features save you from having to manually Google “Invoice Templates” or creating your own version in Microsoft Word.
Maintain Appropriate Records
As a Director of a limited company, you must remember to maintain records about the company and appropriate financial and accounting records. An accountant and accounting software can help with this.
HMRC provide a guide as to what records need to be kept.
Reporting Requirements
If you have hired an accountant (recommended), they will deal with the statutory reporting requirements of your limited company. Once you have provided them with the transactional information (receipts and payments), they will submit the relevant returns on your behalf.
The primary filing requirements for your company are statutory accounts, confirmation statements, corporation tax returns and VAT and PAYE returns, if applicable. You’ll also need to file a self-assessment tax return; however, again, your accountant should be able to do this for you.
Read our Limited Company Director guide for further detail.
Save For Taxes
Unlike working Inside IR35 through a limited company, working Outside IR35 via your own limited company means your taxes are not deducted at source.
After you have invoiced your client, you will receive a single lump sum payment. From this you will need to calculate and pay all the relevant taxes:
- VAT (if applicable)
- Corporation Tax
- Income and Dividend Tax
- National Insurance Contributions
An accountant and accounting software can help you calculate the amount of taxes owed and keep you informed about the relevant payment deadlines.
To ensure you have enough money available to pay the taxes, you should set aside a significant proportion of the revenue you receive. When working outside IR35, I set aside 20% of everything I bill to cover VAT, then 40% of what remains to cover my corporation tax and dividend tax liabilities.
The 40% figure is an overestimate, and I’m always left with money left over in this ‘tax pot’ at the end of the year. That said, I’d rather be prudent and ensure my taxes are covered than struggle to find money once my self-assessment has been submitted. You get to ‘keep the change’ anyway.
I can’t stress how important this advice is; it’s incredibly easy to perceive yourself as richer than you actually are when you start contracting.
Take a contractor earning £500 per day and working 20 days a month. They will invoice their client for £12,000 (£10,000 earnings + £2,000 VAT). £12,000 is a lot of money to receive into a bank account and can lead to overspending as, of that £12,000, only £6,500 ‘belongs’ to the contractor
- £2,000 is VAT
- £1,900 is Corporation Tax
- £1,600 is Income Tax
Many challenger banks have virtual savings spaces where you can keep pots of money separate from your principal balance. You can see an example of Starling Bank’s here.
Pay Into Your Pension
To pay into your pension in the most tax-efficient way as a limited company director:
i) Apply For Auto-Enrolment Exemption
Apply for an auto-enrolment exemption from the Pensions Regulator to avoid contributing to a workplace pension scheme.
ii) Set Up A SIPP
Speak to a financial advisor if unsure which SIPP to go for. I have mine with Hargreaves Lansdown.
iii) Contribute Directly From Limited Company
You can pay up to £60,000 and carry over any unused allowance from the previous three years.
If you’re unsure about any of the above, we recommend speaking to a pension specialist so they can provide bespoke advice based on your individual circumstances. You can also read further details in our guide to Limited Company Pensions.
Claim Relevant Expenses
As a limited company owner, claiming costs as business expenses reduces your business ‘profit-before-tax’. This, in turn, reduces the amount of corporation tax owed to HMRC. For an expense claim to be ‘allowable’, it must be incurred ‘wholly and exclusively’ in the performance of the duties of the employment.
We’ve written a detailed Guide to Limited Company Expenses to help you understand what is allowable and what is not.
Pay Your Taxes
As a director of a limited company, you’ll likely need to pay a combination of:
- VAT
- Corporation Tax
- Income Tax
- National Insurance
- Dividend Tax
Exactly what you need to pay is determined by how much revenue you generate and how you decide to extract money from your company. If you’ve decided to employ an accountant to help you run your company (which I highly recommend), they will handle your tax calculations.
Our guide to Limited Company Taxes provides an overview of the taxes, how they’re calculated and when they’re due.
Pay Yourself
Seeking advice from your accountant is essential when deciding how to pay yourself when working through a limited company.
In general, if you have no other sources of income beyond your limited company the most tax-efficient way for a sole director/employee to withdraw money from their limited company is to take a gross annual income of £50,270, this being split into:
- £12,570 as salary; and
- £37,700 as dividends.
It’s important to note that you don’t have to take all your money out of your limited company; you can also leave some as retained earnings.
Read our guide on Withdrawing Money from your Limited Company for further detail.
Avoid 60% Tax Trap
The standard personal allowance is £12,570 per year. However, if your income exceeds £100,000, this is reduced by £1 for every £2 over £100,000. What this means in real terms is that, for every £100 you earn between £100,000 and £125,140, you only get to keep £40.
Of the £60 you don’t keep, £40 is deducted in income tax, and £20 is lost to the taper. As this is an effective tax rate of 60%, it is known as a ‘tax trap’.
Most contractors try to avoid the 60% tax trap by paying more into their pension, reducing their qualifying earnings below the £100,000 threshold. Not only does this save income tax, it boosts your retirement fund at the same time.
If you want to contribute to a pension, you must decide whether to contribute to a workplace pension or sacrifice salary into a SIPP. Most contractors opt out of the workplace pension and contribute to a SIPP of their choosing. As salary sacrifice reduces income tax and national insurance, it is the best option for those seeking to minimise their tax liabilities.
You must speak to your umbrella company if you want to contribute via salary sacrifice. Given the extra administrative burden, it often comes with supplementary fees, although these are usually minimal.
Build A War Chest
A ‘war chest’ is a cash reserve that acts as your rainy-day fund, a financial fallback intended for use if your income drops. As a contractor, your income can drop for any number of reasons.
You may be forced to take sick leave. A client could be late paying an invoice. Or, most commonly, you may not be able to find a contract, experiencing a break between assignments. It is a very real possibility that you go for months without work (and income).
If this happens, you must have money put aside to cover your outgoings, particularly if you have dependents like children. Although you should already have a war chest before starting to contract, I recommend topping it up with whatever you can afford when working.
How much is enough? Only you can answer that based on your monthly outgoings. A good rule of thumb is to save enough so that you can survive if you go without income for 6 to 9 months. Although this may sound excessive, the more you save into your war chest, the less stressed you’ll be when you go through a period without work.