HMRC’s clampdown on IR35 off-payroll working rules has raised £4.2bn in additional tax, National Insurance, and apprenticeship levy payments between October 2019 and March 2023. Around 120,000 contractors were affected, with the average individual paying £10,000 more in tax.
The reforms first hit the public sector in April 2017, followed by the private sector in April 2021. As a result, many contractors moved from using personal service companies (PSCs) to PAYE employment. HMRC estimates that 280,000 individuals transitioned from PSCs between 2019 and 2022, with 40% doing so directly due to the reforms. The IT, professional, and scientific sectors, including legal, accounting, engineering, and advertising, were the most affected.
The number of new PSCs dropped significantly, with 45,000 fewer than expected between April 2021 and March 2022. Of those who moved away from PSCs, 96% became employees, with 69% working directly for organisations, 18% joining umbrella companies, and 13% using agencies. A small fraction, 0.5%, turned to disguised remuneration schemes, an ongoing concern for HMRC.
The highest tax yield was in 2019/20, generating £1.9bn as contractors switched to PAYE. While IR35 reforms have increased tax revenue, they have also reduced contractor take-home pay by limiting allowable deductions.
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