Following my recent blog around the shortening window of time available to prepare for the April 2020 Off-Payroll Working (IR35) changes, I thought it would be interesting to look at the implications of the changes in terms of real money.
My scenario? A contractor currently running their own PSC (Personal Services Company) who commands £500 per day and invoices for 220 days in the tax year (44 weeks @ 5days/week). Tax code is a simple 1250L and the tax calculations are based on 2019/2020 tax year.
Courtesy of the Contractor Calculator website I was able to feed in the scenario along with an assumption that the contractor is the sole director, claims £3,000 in business expenses and pays themselves £8,000 per annum in salary. The remainder of the £110,000 revenue is subject to Corporation Tax, Personal Tax and Dividend Tax which comes to a sum of £33,884.
This leaves the contractor with a net income of approximately £73,115 per annum or £6,092 per month.
Using the GOV.UK website I used the calculator to back solve the salary required to generate the same net income as the PSC Contractor above.
To provide such a net income using the same Tax Code, the Employer would need to pay a salary of £111,350 to their employee. A figure which would also attract an Employers National Insurance contribution of £13,400 and a Pension contribution of £3,340 assuming a 3% contribution level.
The worker would have PAYE deductions taken from their gross pay of £32,036 along with an Employees National Insurance contribution of £6,191 leaving then with £73,122 net.
For this scenario, I have assumed that a contractor has been forced to process their income through an Umbrella company and as such shut down their Limited company. The hiring organisation has not made any adjustment to the rate on offer, so revenue remains at £110,000 per annum.
For this scenario, I chose the calculator from Parasol as it offered me a detailed breakdown of the illustration it calculated.
So, deductions made from my revenues (Invoiced Value) included £12,500 for Employers National Insurance; £1,368 charge from Parasol; £25,920 PAYE Tax, £5,885 Employee National Insurance leaving me with a net pay of £64, 245.
A quick calculation now shows that I am roughly £8,900 per annum worse off than when I ran my own PSC.
Umbrella arrangement looking for Equivalence:
For this scenario, I have assumed that a contractor has been forced to process their income through an Umbrella company and as such shut down their Limited company. The hiring organisation is open to negotiation and the worker is looking to identify a rate that will give the same net income as previously enjoyed.
For this scenario, I again chose the calculator from Parasol to back solve this question.
Back solving through the calculator, I needed to apply an uplift of 20% taking the invoiced day rate to £600 to give an annual invoice value of 132,000.
Deductions made from this revenue (Invoiced Value) included £15,263 for Employers National Insurance; £1,368 charge from Parasol; £36,721 PAYE Tax, £6,272 Employee National Insurance leaving me with a net pay of £72,380.
Still slightly worse off than when I ran my own PSC but for illustrative purposes near enough.
If we tabulate the illustrative figures above it is quite easy to see the differences and why HMRC feels that they are getting a poor deal when organisations spend on workers who operate a PSC.
Tax revenues on employees and through workers who use a compliant Umbrella are significantly higher. They also come with the added benefit of being paid regularly as the transactions take place rather than annually and in arrears through a CT600 calculation.
Whilst researching this piece I can across a number of interesting Umbrella solutions which even make working through a PSC look unattractive. The best solution illustrated a take home net income of £90,620 from your £110,000 Revenue.
The catch, it is probably not compliant as it combined paying a minimum salary and then providing income which was subject to Capital Gains Tax based on you making some gains from selling shares!
If choosing an Umbrella it is certainly worth checking the full details and also being aware that many organisations will have stringent requirements for compliance as the tax liability can be passed on under the new legislation should any party fail.