Around 120,000 contractors believed to have been affected by off-payroll reforms and fewer “Personal Service Companies” incorporated
The introduction of the off-payroll working rules has seen HMRC rake in at least an additional £4.2bn in taxes since 2021, according to an updated report on the impact of the reforms published by HMRC.
Originally published in December 2022 and updated on 27 February 2025, the report brings new data into the spotlight for the 2022/23 tax years. It sets out the multitude of impacts of regulatory reform in the contracting industry, from the significant increase in tax take to the number of workers estimated to be affected.
The off-payroll rules, also referred to as the IR35 reforms, were introduced in the private and voluntary sectors in 2021 and made medium and large businesses responsible for the IR35 status determinations of contractors they engaged.
At the same time, businesses assumed liability for an incorrect determination, increasing the financial risk of engaging contractors and leading to a knock-on effect on the flexible workforce.
The updated report: key facts and figures
The most important metric for HMRC is the significant increase in tax revenue associated with the introduction of private sector reform: an estimated £4.2bn comprising “additional tax, National Insurance Contributions (NICs) and Apprenticeship Levy payments”.
It’s likely that HMRC has collected much more in the intervening years, with the report only using data up until the end of the 2022/23 financial year.
Around 120,000 workers are “likely to have been affected by the April 2021 off-payroll reforms”, according to the tax authority. This includes contractors “who… have been deemed as an employee for tax purposes by their client, and those who have moved on payroll permanently at other organisations.
The cooling effect of the IR35 reforms has also seen “a reduction in the number of new PSCs [Personal Service Companies] being formed”. This equates to around 45,000 fewer new limited companies being formed than historical trends would suggest.
IR35 reforms created “hostile environment” for contractors
Speaking to the Freelance Informer, Dave Chaplin – CEO of IR35 Shield – lamented the fact that “the off-payroll rules have created a hostile environment for genuine contractors and the businesses that need their expertise”.
As well as being “exactly the opposite of what our economy needs”, it’s a source of frustration for many contractors and IR35 campaigners across the industry.
“Firms have forced almost all contractors who were deemed employees for tax purposes onto payroll”, Chaplin said. Despite the fact that this could be a “potentially incorrect tax treatment” for these workers, there is no route for them to appeal against these decisions.
So, “while the Exchequer celebrates a £4.2bn windfall”, contractors “who once valued the autonomy of limited company operations” instead face a “harsh” reality, Chaplin said.
While urging the Labour government to start supporting the self-employed if it “truly wants to grow the economy”, Chaplin conceded that repeal of the off-payroll rules was an unlikely scenario. He concluded: “For those hoping that the IR35 reforms will be appeal, there are 4.2 billion reasons why that is not going to happen”.
Reading this article makes me really glad to have made the decision of leaving the UK.
At some point with the off-payroll rules I was paying 65% tax. This is not including the tax on earnings I didn’t have that I was paying on my BTL porfolio because of the reforms there regarding interest deduction.
Now, what is the point of working to handle the majority of your earnings to the taxman? I had two choices: Retire immediately or leave the country. I decided I still had a lot to contribute so moved abroad and my business is flourishing outside of the UK.
Now I pay taxes in another country and HMRC doesn’t make a penny out of my work.
I strongly advise anyone in my situation to look abroad. No point allowing HMRC to rip you off.
And for those of us working in the Financial Services industry, HMRC takes an additional 20% VAT on the combined ‘salary’ payment and agency mark-up as very little VAT is reclaimable by the end user. A classic case of double taxation with HMRC having their cake and eating it. My plans are in place to leave the country…
I wonder if this increase in personal taxation and NI has been offset by a reduction in corporation tax takings from limited companies?
And what’s the value of the lost corporation tax and vat that the exchequer will no longer be receiving as a result of replacing PSC engagements with inside IR35 engagements and employment? How many jobs have gone overseas because it’s become more expensive for companies to engage workers based in the UK? I never seem to hear anyone making this point and pushing back on these soundbite headlines.
They don’t mention how much has been lost in Corporations Tax, VAT and TAX/NIC from all the companies forced to close down with the hard working humans moving abroad to be replaced by all the nonworking illegals do they?
It’s just a matter of time now before the country implodes from the weigh of its own incompetence.
Where clients now have to pay employer NI on these payments they will obtain corporation tax relief on that cost.
Where the client is a financial services client, as many were, the contractor will no longer be charging VAT on their services, which the client could not recover.
The contractor would also have been paying tax and probably at least some NI on their earnings.
In total I suspect the actual net gains by HMRC will be much less than they estimate. Meanwhile costs for business significantly increase.
Well it simply must be true
Let’s not look at the lost VAT or the lost CORP TAX or the loss of accountants fees and insurances.
Let’s not look at the 120,000 who can not put money away for a rainy day
Let’s not look at the people with no employment rights BUT all the liabilities
HMRC learning from Mr Trump on selective truths