Public sector contractors – how new tax rules will affect you
May 26, 2017
If you’re a contractor in the public sector then you may be affected by new rules which came into effect on 6th April. The changes to off-payroll working mean that public sector employers must deduct tax and National Insurance at source for contractors which they deem to be ‘inside IR35’ rules. This means that if you currently contract through a limited company and are deemed to be ‘inside IR35’, you will probably have to pay more tax.
You now need to understand what action your public sector client has taken in response to the legislative changes to determine whether you are affected. While some public sector bodies will consider each contractor on a case-by-case basis, it is possible that significant numbers will now consider all contractors to be subject to IR35.
Once your client has determined your IR35 status you may wish to challenge their decision by accessing HMRC’s tool if you feel that it doesn’t accurately reflect your contract.
If your client and the HMRC tool confirm that you are subject to IR35, you will have four options to consider:
Option 1 | Working through an umbrella company
It may be financially beneficial to you to work through an umbrella company, like Umbrella Plus. An umbrella company means you become an employee of Crest Plus, paying tax and National Insurance on your gross salary. The main difference is that you then have access to employee benefits such as sick pay; maternity/paternity pay; holiday pay and access to a company pension scheme. Your employment with Crest Plus is continuous, even when you switch contracts, and this can be beneficial when applying for a mortgage or other types of loan. You can find out more about switching from a limited company to an umbrella company here.
Option 2 | Negotiate an increase in pay
If you are subject to IR35 you may be able to limit the tax and National Insurance impact on your earnings by asking your public sector client or employment agency for a pay increase. If they are willing to increase your rate of pay you may find that you can continue to operate through your own limited company and maintain your present income. However, in the current economic climate it may not be realistic to achieve a higher rate of pay, so you should be aware of other options available to you.
Option 3 | Continue to work through your limited company
If you are subject to IR35 rules, you can continue to contract through your limited company if your public sector client permits and you wish to do so. You would not be able to draw dividends and there would be no corporation tax because the company would not make a profit (all income being your salary which would be taxed at source). However, you would still need to file annual accounts to Companies House which brings administrative burden and possibly cost if you use an accountant.
Option 4 | Agency PAYE
Another alternative to consider is to work through the payroll of your recruitment agency where you will receive your pay after tax and National Insurance have been deducted. It’s worth bearing in mind that many agencies offer a lower hourly rate than you would achieve with other working options. Plus, most agencies don’t offer a contract of employment so giving you the status of a ‘worker’ and entitling you to fewer statutory rights such as access to a company pension scheme. In addition, you may also have to change agencies when you take on new work assignments, therefore making it more difficult to build up a record of continuous employment.
What to do next
You may find it helpful to read our Guide to Your Working Options. To discuss any aspect of the changes to off-payroll working, or to receive illustrations which show how your take-home pay will be affected, please get in touch with our team of specialist relationship consultants on 01244 684700 or complete the form below and we will get in touch.