Tax Accountant

IR35 and Locum Doctors: Understanding the Impact on Your Income

Posted on by Kamlesh Rajput
IR35 and Locum Doctors: Understanding the Impact on Your Income
17
Feb

Introduction
IR35 legislation is a crucial consideration for locum doctors working through personal service companies (PSCs) or as independent contractors. Understanding how IR35 affects your tax status and income is essential to ensure compliance with HMRC regulations while optimising earnings. This article explores IR35 rules, their impact on locum doctors, and strategies to manage financial implications.

What is IR35?
IR35 is tax legislation aimed at combating “disguised employment,” where individuals work as contractors but function similarly to full-time employees to avoid PAYE tax and National Insurance Contributions (NICs). If a locum doctor is deemed to be inside IR35, they must pay taxes similar to an employee, which reduces their take-home income.

How IR35 Affects Locum Doctors

  1. Determining IR35 Status

    • Since April 2021, the responsibility for assessing IR35 status lies with the end client (e.g., NHS Trusts) if they are a medium or large organisation.
    • Small private healthcare providers remain exempt, meaning locums must assess their own IR35 status.

  2. Inside vs. Outside IR35

    • Inside IR35: Treated as an employee for tax purposes; PAYE tax and NICs are deducted at source.
    • Outside IR35: Retains the ability to operate as a contractor with greater tax efficiency.

  3. Factors Determining IR35 Status

    • Supervision, Direction, and Control (SDC): If a locum doctor is directed in how they work, they are more likely to be inside IR35.
    • Mutuality of Obligation (MOO): If the employer is obliged to provide ongoing work and the locum is expected to accept it, they may be considered inside IR35.
    • Substitution: If the locum doctor can send a substitute to complete their work, they are more likely to be outside IR35.

Financial Impact of IR35 on Locum Doctors

  1. Reduction in Take-Home Pay

    • Locums working inside IR35 pay Income Tax and Employee NICs at the source.
    • Employer NICs (13.8%) are deducted from the contract value, further reducing income.

  2. Limited Expense Claims

    • Contractors inside IR35 cannot claim the same expenses as those outside, impacting tax efficiency.

  3. Impact on Pension Contributions

    • Reduced earnings could affect pension contributions and long-term retirement planning.

Strategies to Manage IR35 Impact

  1. Negotiate Higher Contract Rates

    • Factor in additional tax costs when agreeing on contracts with NHS Trusts or agencies.

  2. Consider Alternative Business Structures

    • Joining an umbrella company ensures tax compliance and provides employment benefits.
    • Working through a limited company may still be viable for contracts outside IR35.

  3. Seek Professional Advice

    • A specialist accountant can help assess IR35 status and structure contracts effectively.

IR35 significantly impacts locum doctors, affecting tax liabilities and take-home pay. Understanding the rules and seeking professional guidance can help locum doctors navigate IR35 effectively and make informed financial decisions.