We take a look at what impact the IR35 tax legislation changes will have on contractors, and provide a Net Pay Calculator to help you understand the additional costs.
So far in this IR35 series of blogs, we have laid out the ways in which IR35 tax legislation is changing from 6 April 2021 and how you can prepare in advance, how to assess whether contractors are inside or outside the scope of IR35, and the potential cost impact this change may have on your business.
Now we turn to contractors and how they will be affected. We have worded this for contractors directly so this can be easily shared as necessary.
How will this change affect you, as the contractor?
The IR35 changes are expected to impact 170,000 individuals working off-payroll through their own personal service company (PSC), who would be employed if engaged directly. The measure is targeted at individuals who are not compliant with the current rules; according to HMRC, those who already comply with the existing rules should feel little impact.
As a contractor, you may be affected by the changes if you:
If you answer yes to both of these, then from 6 April 2021, your client will have to assess its engagement with you to see if you are in a deemed employment relationship. It’s important that you discuss this with your recruitment agency and the end client, but you can also use the CEST tool as outlined in our previous blog to establish whether you will fall ‘within the scope’ of IR35 Off-Payroll regulations. The final decision will be made by the client, but this will give you some idea.
Calculate your net pay
If you fall within the scope, then whoever settles your invoice (most likely the recruitment agency) will be responsible for deducting tax and National Insurance Contributions (NICs) from payments made to your PSC. Unless you have only been paying yourself by way of salary from your PSC, this will mean that higher levels of tax and NICs will be paid.
This ‘deemed employment payment’ will be taken from your invoice (net of VAT), and the recruiter will remit PAYE and NICs to HMRC and pay the net to your PSC plus the VAT (if relevant) in satisfaction of its invoice. As whoever is paying your PSC will have to account for Employers NI on top of your fee, you may find that your rates are reduced to accommodate this extra cost.
It is important to note that if you continue to operate through your PSC it will remain your employer, and you will not have employment rights in respect of the fee payer, client, or recruitment firm. Most contractors who find themselves in a position that their assignments fall within the scope of IR35, may close their PSC as it adds extra complexity and cost.
These contractors will either engage with an Umbrella Company or be employed by the recruitment company themselves.
This is where our Net Pay Calculator comes in. This tool aims to help you understand the additional costs of employment when tax and NICs are paid directly as outlined above. Within this simple Excel based Net Pay Calculator, you can enter your pay rate, and then it will work out all the taxes that will be deducted to provide your net pay.
Please watch my video below for more guidance on using the Net Pay Calculator.
We will continue to share more insights on how IR35 will affect recruitment firms and their clients and contractors. In the next articles, we will answer frequently asked questions and how you can work with umbrella companies as an alternative to PSCs. As always, if you have any queries in the meantime, please contact Marie Pegram on 01462 687333 or by email email@example.com.
UHY Hacker Young are recruitment sector specialists and provide expert advice on accounting, finance, taxation and business growth. We understand recruitment and can support you through the ever-changing landscape of this fast-paced industry. With IR35 changes around the corner we can help you build a robust system to tackle this challenge, provide payroll support and review your existing contracts with assistance from our network of other recruitment specialists.
For more information on the key deadlines and guidance ahead of the changes being introduced on 6th April 2021 please download our IR35 Off-Payroll Reform Guide for Recruitment Businesses: