The Growth Series

IR35 changes and what that means for clients

On 6th April, new changes come into play for IR35 (the UK’s anti-avoidance tax legislation for off-payroll working). IR35 has been in effect since April of 2000, but these new changes will mean that  those who work with companies off-payroll, often as contractors, may be affected. From 6th April, all public sector authorities and medium and large-sized businesses in the private sector will be responsible for deciding whether IR35 rules apply.

For some, this will mean a change to their employment status and to how they are taxed. If you have clients who are contractors, these changes may impact which lenders are available to these clients.

Helping clients

Recent research from EY TaxChat shows that as many as one third of self-employed individuals were unaware of the IR35 changes. A further 30% said that they were aware of the changes, but weren’t sure how it would impact them. As a mortgage broker, you can help clients who may be affected determine if these changes affect them.

To help them understand whether or not these changes apply to them, ask these three questions:

  • Who has control over how the work is completed?
    If the company dictates the working hours and/or the location of where the work has to take place, they may be inside IR35.
  • Is there a mutuality of obligations?
    If the company is obliged to give the worker more work once they’ve finished a task, they may be inside IR35.
  • Do you personally have to complete the work you do?
    To be outside of IR35 there should be a substitute clause in their contract, and they should be in charge of that substitute.

Who does this affect?

The goal of IR35 is to determine who is genuinely self-employed and who may be using the designation just to use the tax relief schemes in place. Different rules apply based on whether a contractor sits ‘inside’ IR35 or ‘outside’ of it.

Inside vs. Outside IR35

Because different rules apply to those inside and outside of IR35, it can sometimes be more appealing to work outside of IR35. This is what has caused some contractors to mis-identify their working situation.

When a person is considered to be inside of the IR35 legislation, the following apply:

  • They pay tax and national insurance as if they were a full-time employee
  • They get paid via an umbrella company, the client’s payroll or their limited company
  • They get the same take-home pay as a full-time employee

When a person is considered to be outside of the IR35 legislation, the following apply:

  • Their income is split between low salary plus dividends.
  • They work through their limited company
  • They get higher take-home pay than an employee earning the same base salary

As you can see, changes to a client’s status of working inside or outside of IR35 can impact their income and tax liabilities. It is determined based on how the worker’s services are provided and whether or not their contract is in line with those of a ‘regular employee.’ 

What does that mean?

The changes coming into effect in April 2021 mean that the employee is no longer the person who will determine whether or not they fall under the jurisdiction of IR35. Now, in all cases, the ‘end-client’ who receives the services will identify the worker as ‘inside’ or ‘outside’ of IR35. This could mean that some workers will see their employment status change unexpectedly.

Tax status

When a worker is no longer considered outside of the IR35 legislation, they will be subject to different tax liabilities than they were previously. It means they’ll likely have to pay more in tax and National Insurance contributions.


Because of these changes to tax and National Insurance, these workers will likely find themselves with less take-home pay than they are used to having, which can disrupt the application process.

How might this impact mortgages?

These changes may negatively influence personal finance forecasts and applications. It can raise questions around affordability for some lenders, particularly if there is a risk that additional HMRC payments may be owed due to ‘incorrect’ filing previously.

Of course, these clients will not be blocked from making an application for a mortgage, but it can make the process more complex. To work toward a good outcome for these clients, it will be important to work with lenders to understand what they need. This may come in the form of more evidence of affordability. What this means may differ from lender to lender.

Once you’ve helped your client determine whether or not it applies to them, you may need to help guide them through providing additional proof of income and long-term affordability to what was initially needed. Be sure to work with lenders to find out what is required to keep your clients from being negatively impacted. You may need to place the case with a lender that specifically accepts this type of customer.

The following information is aimed at helping you understand what these changes are so you can be more informed when talking to your contracting clients. It is not your responsibility to help your client work out their IR35 status, that is the responsibility of the firm taking your clients services known as the “end client”.

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