IR35 - really that much different?

[skematicgnu]

Hi all,

I'm a newbie to the forum and to the world of contracting. After a few years in IT testing i decided to set up Ltd and go it alone. However, IR35 is something that at the moment i am having big issues getting my head around. I have read through the 'rules and regs' and i know what status i am, however after looking at all these different calculators online it doesn't seem to make a massive difference in take home pay?

For example, one calculator says that on a basis of £350 a day for 48 weeks a year, the difference would be about £700 a month if i worked outside rather than in.. I appreciate that that's a big number, but i was expecting 1000's!

Is this right or am i missing something?

Thanks in advance!

[Clare@InTouch]

It depends how the calculator works and what assumptions it makes. The value of expenses, pension contributions and salary can make a huge difference. If you want a definitive comparison based on real figures then try giving an accountant a call. They'll be able to do some more accurate figures for you.

If you have two shareholders that can make a massive difference, and that's something a calculator cannot take into account.

[northernladuk]

£700 a month isn't a lot? it is around a £15k a year wage to a permie. It's a lot to me!!

[Wanderer]

it doesn't seem to make a massive difference in take home pay? i was expecting 1000's!

On 350/day your status as being outside IR35 gives you a 20% increase in net income for a single shareholder or a 35% increase if you have a non working spouse you can income split with. So that's an extra £10-18k in your pocket. That's nothing to be sneezed at!

Sorry if that is not enough for you, perhaps you could join one of these offshore tax avoidance schemes where you pay about 10% of your income to the scheme provider and 2% of your income as tax? There are lots of schemes to choose from.

[Craig at Nixon Williams]

£700 difference is based on a sole shareholder I assume! The difference in take-home between being caught or exempt will increase if you have a second shareholder because if you are caught by IR35 then you won't have much (if anything at all) to pay out as dividends after you have taken an IR35 level salary. The difference between the two gets larger as you increase your daily rate.

Remember that over the course of a year the difference will be several thousand and I'd imagine that you'd rather have it in your pocket than hand it over to HMRC!

Craig

[malvolio]

The calculators are also based on you working all year and taking out all the company money, which gives misleading answers.

As a rule of thumb, IR35 costs you 20% on your net take home. It also buggers up pension provision to some extent, and makes maintaining a war chest for bench time somewhat problematic. And, of course, you're paying taxes you more than likely aren't actually liable for.

[skematicgnu]

Thanks for the replies, although one or two seem to have taken my question the wrong way. I didn't want to come across arrogant etc and i'm certainly not looking for an offshore account! I just wondered as a first time contractor what the difference is. Like i said in the original post, £700 is a lot of money.. the question was asked because i was under the impression the difference would be more.

Thanks anyway guys.

[Clare@InTouch]

Thanks for the replies, although one or two seem to have taken my question the wrong way. I didn't want to come across arrogant etc and i'm certainly not looking for an offshore account! I just wondered as a first time contractor what the difference is. Like i said in the original post, £700 is a lot of money.. the question was asked because i was under the impression the difference would be more.

Thanks anyway guys.

The difference can be a lot more if you think longer term. If you limit your income each year to the basic rate band then you can save a lot of money within the company, then liquidate in a few years time and withdraw all the cash at less than 10% (rather than 25% higher rate dividend if you'd taken it each year). That can save you thousands, isn't a possibility if you're inside IR35 as you would have paid 95% as salary, and is something an online calculator can't factor in.