02. 10. 2018
Are you a Limited Company (PSC) worker, still confused about Off Payroll rules (currently in the Public Sector, probably coming to the private sector) and how this affects the way you’re paid, or the way you pay yourself, or how much you'll 'lose'?
We are now over 18 months into the changes made regarding who makes the decision on whether IR35 applies in the public sector, yet there is still confusion as to how this actually hits contractors in the pocket.
We are still speaking to many contractors who make all sorts of claims about how little they will actually take home compared to when they previously worked outside the IR35 legislation, sometimes as little as 40%.
Now whilst I agree that in all but the simplest situation, contractors will be slightly worse off, but it is rarely by the amount that is first perceived (unless, of course, there are some funny goings on in terms of not quite paying the amount of tax owed (strange off shore loans or other illegal avoidance schemes*)
Note that this is not tax advice and I do not intend here to go into specific calculations. Where example figures are used, these are purely that, just simple example figures, but accurate enough to give a fair representation of my points!
The first thing many contractors do is to compare the net amount they will be paid inside IR35 with the gross amount they usually get outside.
For example, a contractor who is used to earning £500 per day outside IR35, is likely now to be offered a rate of around £435 per day inside IR35 (the difference being the submissions that agency needs to make to HMRC for Employer’s NI, as well as the apprenticeship levy if it applies). From the £435 per day, employment deductions of Employee’s NI and PAYE will be made, before the ‘deemed’ payment is made to the ltd company.
If one simply compares £500 per day to the new payment of £435 less deductions, then clearly there is a significant difference.
But it is not that simple as there are other rules / obligations that need to be considered.
For those INSIDE IR35:
Your company is paid the Deemed Payment (the net payment after deductions made to the contractor’s ltd company):
Once the deemed payment is made to the ltd company, you still need a way of taking that money out of your ltd company. This can be done in 2 ways:
If you’re a director of your own company, you might choose to pay yourself a dividend from the company’s profits. You can pay yourself a tax-free dividend up to the total of the deemed direct payment received from contracts in the public sector, where Income Tax and NICs have been deducted at source. You don’t need to declare that dividend on your Self Assessment tax return.
You can pay yourself for the work provided to public sector clients through your company’s payroll. As employment taxes have already been paid on the amount your intermediary (your ltd company) receives,you can pay yourself that amount without deducting Income Tax or NICs.
And the icing on the cake:
No Corporation Tax
When you are calculating your company’s turnover, you should deduct the VAT exclusive amount of the invoice, which is the amount from which Income Tax and NICs were deducted at source. Your company accounts should show this deduction to make sure the amount is not taxed twice.
So to put it simply, the amount paid to you by the agency is yours to take out of your PSC (your ltd company) WITHOUT ANY FURTHER DEDUCTIONS.
For those OUTSIDE IR35
To get your £500 per day out of your ltd company, again you can pay yourself dividends, or a salary (or mixture of both)
The tax advantages between dividends and salary are diminishing but, nevertheless, there is still a slight advantage to dividends. As opposed to the Inside options above, your dividend will be liable to dividend tax, AND corporation tax.
You can take it as salary – but your company will be liable for Employer’s NI (aha, so there’s the difference between the £500 and £435 already gone), then there are the same NI and PAYE deductions taken that were taken for your deemed payment, meaning that if you were to pay yourself purely by means of a salary, your take home will be the same as if you received the deemed payment from the agency.
As you can see, the difference is not as clear as might be first thought, and many roles inside IR35 have the rates inflated to compensate. So next time you are considering turning down a contract opportunity that is caught by the legislation, it might be time to think again!
And to keep things really simple, using a compliant umbrella company means that the legislation will not apply, you will not have the headache of running a company, and your net pay will be virtually identical to a deemed payment.
*Many contractors are unaware of the Employment Intermediaries Legislation which requires employment intermediaries (ie agencies) to submit a quarterly report to HMRC detailing ALL payments made to a contractor / contractor’s ltd company - they know what contractors should be declaring regarding all funds paid through an intermediary.