IR35

IR35 refers to HMRC's off-payroll working rules, originally introduced in 2000 through the Intermediaries Legislation (IR35). The rules are designed to ensure that workers who provide services through an intermediary — typically their own limited company — but who would otherwise be considered employees, pay broadly the same tax and National Insurance as employees.

If a contract is deemed to fall inside IR35, the worker is considered a "deemed employee" for tax purposes. Their income is subject to PAYE tax and National Insurance deductions, significantly reducing their take-home pay compared with being outside IR35. Since April 2021, for medium and large private-sector clients, the responsibility for determining IR35 status rests with the end client rather than the contractor.

IR35 status has significant implications for mortgage applications. Contractors who are outside IR35 can typically have their income assessed based on their limited company's net profit or their gross contract rate, which may result in higher borrowing capacity. Contractors inside IR35 are generally assessed on their PAYE salary, which is often lower.

Some specialist contractor mortgage lenders assess income using the day rate multiplied by the number of working days in a year, regardless of IR35 status. This approach can be more favourable for contractors and is an important reason to use a broker who understands the contractor mortgage market.