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Landed a 3-month contract - IR35 problem. How much £££ would I lose?

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    Landed a 3-month contract - IR35 problem. How much £££ would I lose?

    I've just switched to being a contractor and last week landed a 3 month contract with a central government agency. However, there is one problem. Upon getting the contract reviewed - I'm told that the contract is inside IR35.

    It is paying 300/d for 3 months, but my accountant will have to make deemed payments. I'm new to this, but I'm wondering what the impact will be on me financially if I do this for 3 months only. Going for extensions is not a good idea I'm told.

    What would my day rate be reduced to? How much extra tax would I pay? I don't want an exact figure now - just something indicative. If that's even possible!

    (time to get back on the job boards just in case I think)

    #2
    95% of the income from the contract would need to be paid as salary, and how much tax you pay depends on your other personal income in that tax year. It's no worse than if you were an employee, in fact slightly better.

    You can reduce that 95% too, and pension contributions are a good way of doing that. If you can afford it, chuck a big lump of the income into your pension and that way it won't be taxed as salary.
    ContractorUK Best Forum Adviser 2013

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      #3
      Originally posted by ForBajor View Post
      Going for extensions is not a good idea I'm told.
      I don't follow that logic at all. Particularly if you are already inside IR35.

      Originally posted by ForBajor View Post
      What would my day rate be reduced to? How much extra tax would I pay? I don't want an exact figure now - just something indicative. If that's even possible!
      Your day rate isn't reduced at all - it is exactly what you agreed. You then deduct 5% for expenses and then pay that as salary and pay PAYE and NICs.

      Looking at the first result that Google gives for "IR35 calculator" says that your net salary would be £3177 a month. To compare against someone on £300 a day outside IR35, you need to be on £414 a day inside IR35 according to that website.
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        #4
        Originally posted by ForBajor View Post
        I've just switched to being a contractor and last week landed a 3 month contract with a central government agency. However, there is one problem. Upon getting the contract reviewed - I'm told that the contract is inside IR35.

        It is paying 300/d for 3 months, but my accountant will have to make deemed payments. I'm new to this, but I'm wondering what the impact will be on me financially if I do this for 3 months only. Going for extensions is not a good idea I'm told.

        What would my day rate be reduced to? How much extra tax would I pay? I don't want an exact figure now - just something indicative. If that's even possible!

        (time to get back on the job boards just in case I think)
        Hi ForBajor

        To even give a rough guide I'd need to know your previous earnings this tax year and a rough estimate of expenses that you will incur in relation to this contract (mileage, accommodation, subsistence, PI, Pension contributions).

        Based on turning over £18k from this contract you could quite easily mitigate most of the effects of IR35 with some decent planning but this depends on whether you've had income this year already, are you in a position to make pension contributions etc.

        Martin
        Contratax Ltd

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          #5
          You won't lose anything technically. It's inside IR35. Those are the terms. Do you mean what would be the difference between a gig inside IR35 and a gig outside IR35? Does that really matter if you need to take this one? You need to work out how much it's costing you on the bench and if you can afford to turn it down.

          It appears you have an accountant. Why don't you ask him/her?
          'CUK forum personality of 2011 - Winner - Yes really!!!!

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            #6
            Originally posted by TheFaQQer View Post
            I don't follow that logic at all. Particularly if you are already inside IR35.


            Your day rate isn't reduced at all - it is exactly what you agreed. You then deduct 5% for expenses and then pay that as salary and pay PAYE and NICs.

            Looking at the first result that Google gives for "IR35 calculator" says that your net salary would be £3177 a month. To compare against someone on £300 a day outside IR35, you need to be on £414 a day inside IR35 according to that website.
            Yep - just taken a look at that. The additional tax payable is a real eye-opener I must admit.

            Comment


              #7
              So to boil this down...

              I could be earning 20%+ less a month on this contract.
              My monthly expenses to live are about £1400.
              I have savings to last 4 months out of work.

              My day rate at market rates is on average £400/d, so getting me at 300/d is a pretty good deal for them. If fact it's a great deal for them considering the project they are assigning me to, as I have bags of experience.

              I could go for this contract as-is, knowing that another contract could come up which could earn me a lot more - so I could depart before the end. However the client is quite prestigous so it would be good from a networking point of view.

              I could report back to the agency about the contract (which said assured me was OUTSIDE IR35), and just be open with them saying I'll take this but please bear in mind this contract is INSIDE IR35 and I'll incur additional tax overheads which reduce the rate down to £240/d (roughly). Would it be wise to just be open with them about it - or just take the job, do my 3 months on good terms, and then go elsewhere?

              Earning 20% less from this contract makes it a less attractive option. It's not terrible, but it's an offer on the table.

              Comment


                #8
                It's not '20% less' than anything unless you have something else on the table which is paying more.
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                  #9
                  At the end of the day, the wording of the contract just makes it easier to start an IR35 defence. You can have the nicest possible contract wording in the world, but if it doesn't match the reality of the working conditions, then it's meaningless - an IR35 investigation will see through the sham.

                  There is a whole range of options available to you, and only you can decide which is the best way forward, eg.
                  • Walk away from the contract and find something else
                  • Stick with the contract at the agreed rate, and declare yourself inside IR35
                  • Take the contract inside IR35, but negotiate a higher rate now that you know the additional tax costs
                  • Take the contract at the agreed rate, declare yourself outside IR35, and hope that there isn't an investigation
                  • Negotiate the contract so that the wording is better, declare yourself outside IR35, and make sure the working practices match the contract


                  If you are considering taking the contract and then walking if you find something better, make sure you read the contract carefully for the termination clauses, and stick to them. You wouldn't want to walk on the contract and then find yourself in trouble for breach of contract.
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                    #10
                    Originally posted by TheFaQQer View Post
                    At the end of the day, the wording of the contract just makes it easier to start an IR35 defence. You can have the nicest possible contract wording in the world, but if it doesn't match the reality of the working conditions, then it's meaningless - an IR35 investigation will see through the sham.

                    There is a whole range of options available to you, and only you can decide which is the best way forward, eg.
                    • Walk away from the contract and find something else
                    • Stick with the contract at the agreed rate, and declare yourself inside IR35
                    • Take the contract inside IR35, but negotiate a higher rate now that you know the additional tax costs
                    • Take the contract at the agreed rate, declare yourself outside IR35, and hope that there isn't an investigation
                    • Negotiate the contract so that the wording is better, declare yourself outside IR35, and make sure the working practices match the contract


                    If you are considering taking the contract and then walking if you find something better, make sure you read the contract carefully for the termination clauses, and stick to them. You wouldn't want to walk on the contract and then find yourself in trouble for breach of contract.
                    The notice period is in a schedule to the contract which apparently has not been released yet. I think I will grab this first and then make a decision. Options 2 or 3 are looking likely here.

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