IR35 - Agency Calculation of Day Rate when moving to PAYE

[Nkmatt1]

To anyone with the knowledge I would welcome your advice. It seems likely that I will fit inside IR35 so I asked my agency to calculate what my day rate would be post 6th April if I was to go PAYE. I am told that they would immediately reduce my day rate by 28% BEFORE deducting Tax & NI. This would mean a drop of 62%! When I asked for clarification on the reduction, before tax % NI, I am told "This is because when you are paid LTD your Holiday and Employers NI are enrolled into your rate. When you are PAYE the Employers NI is paid out to HMRC and the holiday is accrued". This sounds at best incompetence and at worst an attempt at extortion. However, is what they are saying correct?

[Patrick@Intouch]

Hello,

Your day rate as a contractor is inflated to account for the fact that you don't have any entitlement to holiday pay, sick pay etc... and that your end client has no liability to employers NIC.

Employers NIC is an additional 13.8% on everything over £8,112 currently and so is already a big chunk of this decrease. Add that to 20-25 days paid leave plus bank holidays and the cost of pension contributions and training etc... and the 28% that you have quoted starts to loom.

Without going into full calculations it would be difficult to attest to the advice that you have been given but the above are some of the factors that will have been considered.

you could also maintain or ask for an increase in your day rate to either continue to contract through your PSC or use an Umbrella function. Some contractors who are inside the new rules are negotiating increases to their day rates of around 20% considering these scenarios.

[MrMarkyMark]

To anyone with the knowledge I would welcome your advice. It seems likely that I will fit inside IR35 so I asked my agency to calculate what my day rate would be post 6th April if I was to go PAYE. I am told that they would immediately reduce my day rate by 28% BEFORE deducting Tax & NI. This would mean a drop of 62%! When I asked for clarification on the reduction, before tax % NI, I am told "This is because when you are paid LTD your Holiday and Employers NI are enrolled into your rate. When you are PAYE the Employers NI is paid out to HMRC and the holiday is accrued". This sounds at best incompetence and at worst an attempt at extortion. However, is what they are saying correct?

I would worry less about what you can potentially earn in the future and be more concerned about possible retrospective taxation if you carry on working with the same PSB and you are pretty much admitting you were always inside IR35.

[PurpleGorilla]

Let me get this straight.

Inside ir35 you pay;

Employers NI
Employees NI
Employees IT

On the full rate (-£5,000 for expenses?)

[eek]

Let me get this straight.

Inside ir35 you pay;

Employers NI
Employees NI
Employees IT

On the full rate (-£5,000 for expenses?)

Its covered with an example calculation at http://forums.contractoruk.com/publi...ml#post2360157

Basically it works like this:-

Employers NI has to be paid by the agency directly (that will deduct 14.3% from your pay 0.5% is to cover the apprenticeship fees that start in April for companies with £3m in staff costs).
The agency then needs to withhold Employees NI and income tax (and send that to HMRC on your behalf) paying you the rest.

A contract that is inside IR35 with tax withhold is not allowed the 5% expenses deduction.

How agencies handle holiday pay will depend on their own rules.

[RonBW]

On the full rate (-£5,000 for expenses?)

In the public sector, inside IR35 means that you get no 5% allowance. Outside public sector, inside IR35 means that you get a 5% allowance.

This is because you no longer have the uncertainty of the rules (or something like that) so you no longer incur any more expenses, obviously.

[teapot418]

To anyone with the knowledge I would welcome your advice. It seems likely that I will fit inside IR35 so I asked my agency to calculate what my day rate would be post 6th April if I was to go PAYE. I am told that they would immediately reduce my day rate by 28% BEFORE deducting Tax & NI. This would mean a drop of 62%! When I asked for clarification on the reduction, before tax % NI, I am told "This is because when you are paid LTD your Holiday and Employers NI are enrolled into your rate. When you are PAYE the Employers NI is paid out to HMRC and the holiday is accrued". This sounds at best incompetence and at worst an attempt at extortion. However, is what they are saying correct?

If you are still operating via your PSC "inside", then the holiday pay etc does not apply, and it is the agency's responsiblity to pay the employer's NI (and apprenticeship levy) from their margin. Clearly the agency margin was never intended to cover employer's NI, so they will need to renegotiate rates with either you, the client or both to cover this extra expense.

If your agency is suggesting you operate via an umbrella, then yes, the umbrella will need to deduct holiday pay etc to cover your rights under AWR.

Also be aware that inside IR35 means you cannot claim travel and subsistence expenses.

And, as others have said, you need to consider the risk of HMRC looking at your pre-April engagement and finding it also to be inside IR35.

[PurpleGorilla]

Sticking your rate up 20% won't be enough then. More like 50%?

[teapot418]

Sticking your rate up 20% won't be enough then. More like 50%?

Sticking two fingers up would be a better response IMV. YMMV.