If you as an individual enter directly into a contract with an employer, you will receive a salary that would be subject to Income Tax of up to 45% and National Insurance Contributions of up to 12%.
Where a limited company enters into the same contract then the tax rules are different. A limited company will not be viewed as receiving a salary. It will make a profit on which it will pay business tax of only 19% and most importantly it will not be subject to National Insurance Contributions at all.
To prevent every employee from setting up their own limited company in order to avoid National Insurance and the potentially higher levels of tax, this is where IR35 steps in.
If certain conditions are met under IR35, then the earnings of the company are considered to be a ‘salary’ on which Income Tax and National Insurance Contributions are payable.
