Q. I am a contractor employed by an agent working in a local authority. I pay myself through a Limited Company. After April If I am deemed to be inside IR35 I understand I will have to pay the same tax and NI as a permanent employee. My question is, if I end up being inside IR35, and having to pay employees tax and NI, will I still need to pay all the running costs of a Limited company, e.g. corporation tax? If this is the case, running a limited company would not financially viable. Would going through an umbrella company be the best option.
A. There is no corporation tax payable providing all inside IR35 income in the year is drawn out as payroll.
To the extent money is left in the bank account this will attract corporation tax as profit in the year, but this may change in the actual legislation where the corporation tax liability is removed as the income has already been taxed at source.
Business expenses remain allowable and while materials are deducted at source it appears tax relief on other business expenses is reclaimable through self-assessment.
If you are moving between public and private entity contracts PSC still has its attractions and if the agency deducts the cost of employers NI from the day rate, tax burden in the PSC is similar to that of umbrella providing income is drawn out as salary.
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You will have to pay a lot more tax than an employee as will be liable for employers NI and may also have to pay VAT if you are over the threshold.
In total around 70% of your rate will go to the Government in tax although the VAT will be charged on top of your daily rate.
No, not quite, If you are inside IR35 then your PSC doesn’t have to pay employers NI as they are no longer your employer for tax purposes. The engager who is deemed to be your employer will have to pay the employers NI.
I dont understand why these contractors dont all get together as “Havering Council Consultants Ltd”, and sell their services thru the company owned by all of them. No different from IBM or Accenture supplying consultants.
That’s all well and good, but all the consultants must be on the payroll or the off-payroll working legislation kicks in. Either way, they would be no better off.
The difference being they could then charge £800 a day £200 less than the usual supects 😉 You do realise most contractors will sod off to the private sector, government will become paralyzed from implementing new programmes and have to turn to the usual big consultancies to onshore some work, except Brexit and new rules on immigration minimum salaries means they can’t onshore, and data protection rules mean it can’t off shore. So There’s a moment of opportunity for medium size “association” type companies, think LLP, of related skilled contractors to bid for work. Yeah that’s as likely as herding cats, but you can try. I’d prefer to be an employee “partner” on £150k a year and paying 60% tax than a solo freelancer on 80k a year paying £30% tax. Besides – who syas you have to take it all as salary. Pensions, benefits schemes (as in life insurance, shopping vouchers and childcare – not dodgy loans), company cars (especially EVs with big CT saving for the company and BiK and fuel savings for employees) are all great ways to avoid handing cash to HMRC. As long as you wanted the things anyway.
Not if they are all partners, take lowish salaries and draw profits in dividends !
In ordinary circumstances the government could be expected to introduce as soon as possible to the private sector IR35 reforms mirroring the forthcoming public sector measures. The objective would be to remove contractors’ options to operate their companies efficiently.
Big corporations could be expected to grumble but ultimately fall in line and transfer the burden of implementation to the intermediaries which are always under commercial pressures.
Contractors would be left with Hobson’s choice: IR35 in the public sector or IR35 in the private sector. A junior minister would get up on his hind legs and bray that this government has always been committed to choice.
Brexit may be your friend. The government is now desperate to prevent a mass corporate stampede for the UK exit doors. So much so that they have even been threatening to turn the UK into an offshore tax haven from the EU. Four legs good, two legs better. Whether the government is prepared to risk corporate discontent by imposing yet more regulation remains to be seen.
Governments rarely do anything brave or useful and the net gain from IR35 is negligible in the grand scheme of things right now.
If contractors really do want to preserve a meaningful choice of operating structures they would do well to turn their backs on the public sector right now. It would encourage the government to take a more reasonable position to re-establish a supply of skilled labour to councils, hospitals and the other public sector bodies reliant on contractors. It could put private sector reform on the back burner for some time to come.
I think, on reflection, I need to get a substantial supply of popcorn in.
‘Cos the next few months are going to be absolutely glorious to watch.
I don’t think HMRC has a clue just how many freelancers are working inside the government. I think it reckons they are all IT contractors and nothing else.
But now I understand a bit more; the Cabinet Office is stuffed full of them, so too The Treasury, GCHQ, the MOD.
And a fair few are going to bugger-off in the next few weeks en masse. Those that can hop off will, and those (the less skilled invariably) will stay.
TfL have adopted the best line; get rid of all the contractors, and then when the big inevitable outage occurs and one-or-more Tube lines are stuffed, who will they blame? Step forward The Treasury and in particular The Chancellor.
This is going to be fun to watch.
A few questions
Currently my business has to have £2m PL and PI insurance, if I’m taxed as a deemed employee does this mean I won’t need to buy insurance policies any more?
Who will pay my employer NIC?
If my limited company is paid net of personal tax does that mean the payment is a personal payment to me – i.e. Into my personal bank account rather than business account?
Am I expected to pay my limited companies employees from the net payment and claim back?
How does VAT come into play?
A few questions
Currently my business has to have £2m PL and PI insurance, if I’m taxed as a deemed employee does this mean I won’t need to buy insurance policies any more?
Who will pay my employer NIC?
If my limited company is paid net of personal tax does that mean the payment is a personal payment to me – i.e. Into my personal bank account rather than business account?
Am I expected to pay my limited companies employees from the net payment and claim back?
How does VAT come into play?
Thoughts?
Admittedly this is not a Public sector contract, but our computer contracting business has lost money in every year that the contracts have been deemed to be inside IR35. The 5% allowance for expenses before I have to calculate the deemed salary is inadequate for the costs we incur.
This year we have a contract outside IR35. If this had not been the case I fear the company might have run out of money.
I generally try to avoid working for the Public Sector as it’s usually pretty painful so this new nonsense isn’t likely to directly affect me – except by increasing competition for private sector contracts which are already thin on the ground due to half the world being over here.
We all think they won’t roll this out to the private sector because it would be such a stupid thing to do – this tell me it’s just a matter of time.
Successive governments have and are continuing to destroy IT as a viable career in this country. They are steadily bringing down remuneration to that of a secretary. I am personally looking at bringing forward semi-retirement by ten years, working part time doing something else and claiming as many tax credits and freebies as I can.
Almost my entire lengthy career has had the Government on my back, despite paying huge sums in tax while half the country is on the take.
My prediction is that quite a few public sector contractors may decide to bring forward their retirement and go on the take instead. This would be the best response in my opinion. Never mind, they can always flood the country with even more third world labor.
Don’t forget £5000 in dividends are tax free. If you have a home office for administering your Ltd Company then certain expenses related to that can be claimed. Problem is the greedy ill-advise high profile people who were drawing a salary below minimum wage and paying themselves big dividends wrecked for the rest of us; and in any event their dividends were still taxable unless they hived them off to some off-shore accounts. Just carry on as normal and don’t be greedy with your dividends.
“Don’t forget £5000 in dividends are tax free.”
Not exactly a large amount and it’s not tax free it’s had corp tax paid on it.
“If you have a home office for administering your Ltd Company then certain expenses related to that can be claimed.”
This amounts to a couple of hundred pounds a year, a drop in the ocean.
“Problem is the greedy ill-advise high profile people who were drawing a salary below minimum wage and paying themselves big dividends wrecked for the rest of us”
Greed has nothing to do with it. The law is the law. If the law allows small salary/large dividends then why wouldn’t you use that law to maximize your take home pay? I personally owe the tax man/government nothing.
“Just carry on as normal and don’t be greedy with your dividends.”
I think the point is, a lot of people are not going to be able to carry on as normal. They won’t be allowed any dividends. MPs and other assorted troughers will be allowed to continue paying dividends from their own private companies as much as they like though.
NumberMill has launched a service called Protect which will be able to assist in maintaining PSC status for contractors as the fundamental legislative basis for IR35 has not changed – it is merely an extra hurdle.
http://www.numbermill.co.uk