If you're a contractor working in the UK, you’ve probably heard of IR35, and if you've been found to be inside IR35, you may be wondering what this means for your take-home pay and your ability to claim business expenses.

The reality is that IR35 can significantly affect the tax benefits that make contracting attractive in the first place. That doesn’t mean all expense claims are off the table, though. In this guide, we’ll explore what you can still claim when working inside IR35, what’s off-limits, and how to make the most of what is still available.

What does it mean to be ‘inside IR35’?

Let’s start with the basics.

IR35 is a set of tax rules introduced by HMRC to tackle what it considers “disguised employment.” That is, where contractors work through a Limited company (also known as a personal service company or PSC) but, in practice, operate like employees.

If you are inside IR35, it means HMRC has determined that you are working in a way that more closely resembles an employee than a true independent contractor. As a result, you are required to pay Income Tax and National Insurance Contributions (NICs) as though you were employed.

This can be a tough pill to swallow. Not only are you taxed at employee rates, but you also lose many of the rights and benefits that come with being an actual employee, such as holiday pay, sick pay, or pension contributions from your employer. On top of that, your ability to claim expenses becomes much more limited.

Who decides IR35 status?

Since April 2021 (in the private sector), it is usually the end client, not the contractor, who decides IR35 status. For medium and large-sized clients, it’s their responsibility to assess your working relationship and determine whether it falls inside or outside IR35.

If you're working with a small private company (as defined by HMRC), the responsibility may still fall on you as the contractor. Either way, once you're found to be inside IR35, the tax treatment and expense rules change significantly.

How are contractors paid inside IR35?

If you are found to be inside IR35, your income is generally treated as employment income and taxed via the Pay As You Earn (PAYE) system. This can happen in two ways:

1. Through an Umbrella Company: You become an employee of the umbrella company. They handle payroll, taxes, and sometimes even limited expense processing.
   
   
2. Through your own Limited company: You may still operate through your PSC, but the fee-payer (usually the recruitment agency or client) will deduct tax and NICs before paying you. You receive what’s called a deemed salary.
   
   

Both methods reduce your ability to deduct business expenses, but there are still a few categories you can claim, depending on your setup.

Allowable expenses inside IR35 (Limited company contractors)

If you continue to use your Limited company while working inside IR35, your ability to claim expenses is largely curtailed, but not entirely eliminated.

Here are the key categories still available:

1. 5% Flat-Rate Allowance (Limited companies only)

If you’re working inside IR35 through your Limited company, HMRC allows a 5% flat-rate deduction from your gross income. This allowance is designed to cover the general costs of running your company, including:

• Accountancy fees
• Office equipment and software
• Bank charges
• Business phone and internet costs
• Admin support

This 5% deduction is meant to simplify the process by eliminating the need to calculate actual expenses for running your company. However, it’s important to note:

• You can’t claim both the 5% allowance and individual operating costs (e.g. actual accountancy fees).
• This allowance is not available if you’re using an umbrella company.

2. Professional indemnity and business insurance

Insurance premiums related to your work, such as professional indemnity, public liability, or employer’s liability insurance, are usually considered allowable business expenses. Even inside IR35, you can typically continue to claim these if you are working through your Limited company.

Make sure you keep all invoices and proof of payment to support your claim.

3. Training costs (maintenance of skills only)

Training can only be claimed as an expense if it is directly related to maintaining your existing skillset. For example, a refresher course on a coding language you already use in your current contract might be allowable.

However, training for a new skill or qualification that is not immediately required for your contract would be considered a personal investment and is therefore not claimable.

4. Travel and subsistence (highly restricted)

One of the major changes for contractors inside IR35 is the restriction on claiming travel and subsistence expenses.

In general, you cannot claim for:

• Travel between your home and your client’s site (considered commuting)
• Meals and daily subsistence
• Overnight stays for regular client work

However, you may be able to claim expenses if:

• You are travelling to a temporary workplace for less than 24 months
• You work at multiple locations and your contract requires mobility
• You are required to travel outside your normal commuting area for business meetings or site visits

You must be able to demonstrate that the travel is wholly, exclusively, and necessarily for the performance of your duties.

What about Umbrella Company contractors?

If you’re working through an Umbrella Company, the rules are slightly different. Since you are technically an employee of the umbrella, all income is taxed at source via PAYE, and you generally cannot claim traditional self-employed expenses.

Some Umbrella Companies do allow the processing of certain reimbursable expenses, such as:

• Mileage or train fares for business-related travel (if approved in advance)
• Accommodation for temporary work locations
  Professional memberships or subscriptions (such as to the IT or engineering institute)

Check with your Umbrella Company to see if they have an HMRC-approved expense policy in place. Keep in mind that you must always retain receipts and submit them according to the Umbrella Company’s process.

Expenses you cannot claim inside IR35

It’s important to understand what is no longer considered allowable when working inside IR35. These include:

• Home office expenses
• Daily meals and subsistence
• Travel to a regular workplace
• Training for a career change
• Entertainment expenses
• Use of home as an office (unless specifically required by the contract)

Even if these would normally be valid business expenses for a self-employed person, they are not considered legitimate deductions under IR35’s employment-style taxation.

Record keeping and compliance

Even though your expense options are limited inside IR35, maintaining proper records is still essential. Keep all:

• Invoices
• Bank statements
• Receipts
• Mileage logs
• Payroll and pension contribution records

This is especially important if you intend to claim the 5% allowance, pension contributions, or anything related to temporary travel.

HMRC can request to see your records for up to six years, so it’s worth keeping everything clearly documented.

Is it still worth contracting inside IR35?

While the appeal of contracting is undeniably reduced when working inside IR35, it’s not always the end of the road. You still maintain some flexibility in terms of how you work, and with careful planning, you can minimise your tax liability within the rules.

If you find yourself frequently caught inside IR35, consider the following:

• Can you renegotiate contract terms or working practices to fall outside IR35?
• Is it worth continuing with your Limited company, or would an umbrella solution be more efficient?
• Can you use pension planning and professional advice to maintain long-term financial health?

Always work with an accountant who understands the nuances of IR35 and contractor finances. The rules are complex, and the consequences of getting it wrong can be expensive.

Need help understanding your IR35 status or expenses?

If you're unsure about what you can claim, whether your contract places you inside or outside IR35, or how to structure your income in the most tax-efficient way, it’s a good idea to get expert advice.

Crunch offers unlimited access to accounting support and advice, giving you the confidence that your finances are in good hands. With our team of accountants, you can get clear, personalised guidance to help you navigate the complexities of IR35, stay compliant, and keep more of what you earn.

IR35 rules can be tricky, but with the right support, you don’t have to face them alone.

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