Reply to: IR35 : >42% tax, and call it fair?

[northernladuk]

Cheers - not been on here for long so obviously haven't read back like I perhaps should have.

Best thing to do is use the Google search method to find stuff on the forums. It's explained in the Welcome/FAQ but in summary just type the

(keywords) site:forums.contractoruk.com

Change the keywords a bit if you don't find anything.

[sim2kuk]

There isn't a correct. There are alsorts of factors to be considered and we've long said these must be taken with a large pinch of salt. Even if we got them all the same they wouldn't actually match the reality for anyone due to all the different circumstances everyone has.

Pick the average/median and just work with that. It will be close enough to allow you to make whatever decisions you are after.

Cheers - not been on here for long so obviously haven't read back like I perhaps should have.

[northernladuk]

I'm trying to work out what the actual tax differences are between Inside and Outside IR35 through Ltd company and inside IR35 through Umbrella.

Was using the Nixon Williams calculator, and an inside IR35 contractor on 500 a day working 45 weeks should still have an income of around £6k p/m. However, on ITContracting this is £5.4k and Contractor Calculator it's £5.2k. This is using a Ltd company.


Bit confused as to what is correct...

There isn't a correct. There are alsorts of factors to be considered and we've long said these must be taken with a large pinch of salt. Even if we got them all the same they wouldn't actually match the reality for anyone due to all the different circumstances everyone has.

Pick the average/median and just work with that. It will be close enough to allow you to make whatever decisions you are after.

[sim2kuk]

I'm trying to work out what the actual tax differences are between Inside and Outside IR35 through Ltd company and inside IR35 through Umbrella.

Was using the Nixon Williams calculator, and an inside IR35 contractor on 500 a day working 45 weeks should still have an income of around £6k p/m. However, on ITContracting this is £5.4k and Contractor Calculator it's £5.2k. This is using a Ltd company.


Bit confused as to what is correct...

[JohntheBike]

What have they stated specifically? I have heard nothing about HMRC stopping salary sacrifice type contributions, which for those of us using an umbrella means we can make pension contributions pre-tax (but post minimum wage taxes) up to £40k/year as a basic rule.

I presume they mean contractors using Ltds while inside IR35, where tax is deducted by the fee payer so pension contributions from the Ltd don't qualify for tax relief as the Ltd receives income post tax?

Can you clarify if that is/isn't the case or point us to HMRC's official notes on this?

yes, it's for contractors using an LTD who are assessed as inside IR35

[Hobosapien]

OK, there will be some exceptions. There is of course the EES cap to consider. But in principle, it is a facility that can be available to an employee and I used it when I was in permanent employment. But HMRC have categorically stated that it won't be available for contractors judged inside from April 2020.

What have they stated specifically? I have heard nothing about HMRC stopping salary sacrifice type contributions, which for those of us using an umbrella means we can make pension contributions pre-tax (but post minimum wage taxes) up to £40k/year as a basic rule.

I presume they mean contractors using Ltds while inside IR35, where tax is deducted by the fee payer so pension contributions from the Ltd don't qualify for tax relief as the Ltd receives income post tax?

Can you clarify if that is/isn't the case or point us to HMRC's official notes on this?

[Hobosapien]

When I started contracting as an actuary years ago, I first looked at umbrellas and they all said they refuse to take on actuaries because it is too high risk. That helped make the limited company route a no-brainer. FYI: Indemnity for actuaries costs from £1,500/year


I've just done a search and that still seems to be the case today
LINK: Please note our Professional Indemnity policy does not cover workers in the following trades:Actuaries/Independant Financial Advisors


So if clients do blanket inside determinations, it seems the possibilities would be
* Umbrella companies start covering actuaries/IFAs (possbilly at a higher monthly fee)
* New umbrella companies are launched focussing on actuaries/IFAs
* Umbrella companies insist that actuaries/IFAs still take out a separate PI policy costing £1500+/year
* Contract inside35 via the Ltd and not get a single penny of tax relief towards £1,500 PI or accountancy costs

My comment was based on IT contracting which is the main focus of this site, so I don't know anything about your situation, but sounds like the issue is due to the nature of the work regarding financial advice so requires a specialist approach to tailor to your needs to ensure both you and any service provider you operate via (such as an umbrella) would be suitably covered from any blowback.

Just shows that HMRC trying to cover everyone with 'simple' rules (if you work then you're an employee) in the pursuit of 'fairness' causes much trouble for specialist niches of which we are all part of to varying degrees.

[DeathAndTax]

Contracting inside IR35 via a Ltd will be less efficient than via an umbrella (already is if contracting in public sector) as the accounting fees alone will likely offset the umbrella fees if not being fleeced. Then there's all the other hassles and costs of running a Ltd if used solely for contracting.

Even the idea of avoiding inside IR35 contracts if persevering with a Ltd is not guaranteed to be more efficient, as the bench time between contracts if the outside IR35 contracts are scarce means those doing inside IR35 gigs via a brolly (with a suitable rate uplift if can secure it ) have one less thing to worry about when looking for new contracts and whether to dismiss them.

When I started contracting as an actuary years ago, I first looked at umbrellas and they all said they refuse to take on actuaries because it is too high risk. That helped make the limited company route a no-brainer. FYI: Indemnity for actuaries costs from £1,500/year


I've just done a search and that still seems to be the case today
LINK: Please note our Professional Indemnity policy does not cover workers in the following trades:Actuaries/Independant Financial Advisors


So if clients do blanket inside determinations, it seems the possibilities would be
* Umbrella companies start covering actuaries/IFAs (possbilly at a higher monthly fee)
* New umbrella companies are launched focussing on actuaries/IFAs
* Umbrella companies insist that actuaries/IFAs still take out a separate PI policy costing £1500+/year
* Contract inside35 via the Ltd and not get a single penny of tax relief towards £1,500 PI or accountancy costs

[professor]

both instances are doing so in the same capacity, i.e. individuals.

Normally, Yes. However here the issue comes when the govt wants to see the PSC as an individual. The govt cannot have it both ways.

PSC acts as an employer and is liable to deduct tax and NIC.

As you said, the entity is subject to its own tax structure- which means there is no law asking to pay NIC on the entire income. Again, govt cannot have it both ways.

regard the PSC as little more than a staging post?

Not at all, the govt (wrongly) sees that way and causes this grievance- sort of like a bully wanting you to accept what you are not

taking home more money even if they are doing 'the same job’

People doing same job can have different fees/salary (various reasons). Dosh is the only scale. Tax is on the Dosh (not on the reasons why the earnings are different)

>PSC doesn’t want to see itself as an individual. If the govt wants to (wrongly) see the PSC as an individual, then the principles that binds individuals must be invoked.

contractor's receipts are payment in lieu of untaxed benefits/rights...use a deemed payment based on about 65-70% to reflect that

'tax due' assessment on … all the employer/employee taxes and employee benefits would be included

>Interesting turn. We could pray to Hon Justice to see that the employment benefit in kind (EBIK :-) he receives is to be taxed or else leave the contractor alone. They must stand up for fairness.

[webberg]

no, what I'm saying is that if I'm an employee, then the amount that I pay to my pension is deducted from the gross prior to any tax and NIC liability being calculated.

I agree that the pension contribution creates a tax deduction.

I do not agree that it reduces NIC unless as mentioned above you are in some form of salary sacrifice arrangement.

I do think that as I said earlier a sum paid to a PSC that is to be treated as income of the individual who is inside IR35, can be reduced for both tax and NIC purposes by the PSC making a contribution.

So in general the contribution from Maslins above I prefer as the better analysis.

[JohntheBike]

Not always true. Depends on whether it's done via salary sacrifice in return for larger employer pension contribution.

Where it's not, and it's an employee's pension contribution, NIC typically isn't saved on th pension amount, and sometimes higher rate tax relief isn't claimed either unless the individual makes a specific claim. I think this is something that an awful lot of people (including professionals) missed, and is why many employers are drifting towards salary sacrifice instead of employee contributions.

OK, there will be some exceptions. There is of course the EES cap to consider. But in principle, it is a facility that can be available to an employee and I used it when I was in permanent employment. But HMRC have categorically stated that it won't be available for contractors judged inside from April 2020.

I see nobody questioning this position with regard to EU (we're still in it) taxation rules, which I understand, but someone here is bound to correct me, that the targeting of an identifiable section of people for special taxation provisions is unlawful. No one seems to be discussing these issues.

[Maslins]

no, what I'm saying is that if I'm an employee, then the amount that I pay to my pension is deducted from the gross prior to any tax and NIC liability being calculated.

Not always true. Depends on whether it's done via salary sacrifice in return for larger employer pension contribution.

Where it's not, and it's an employee's pension contribution, NIC typically isn't saved on th pension amount, and sometimes higher rate tax relief isn't claimed either unless the individual makes a specific claim. I think this is something that an awful lot of people (including professionals) missed, and is why many employers are drifting towards salary sacrifice instead of employee contributions.

[JohntheBike]

Ah I see.

Your assumption is that the payment from the end client/agency - inside IR35 - is going to the PSC and that there is an obligation upon the PSC to make deductions.

However the PSC has made a pension payment thus reducing the tax and NIC.

The PSC is making the pension payment.

Is that correct.

no, what I'm saying is that if I'm an employee, then the amount that I pay to my pension is deducted from the gross prior to any tax and NIC liability being calculated. So, in effect an employee can mitigate their tax bill by increasing their pension contributions. So, if for example an individual were close to the upper tax bracket, or any watershed where increasing their pension contributions would be desirable, then they have the opportunity to do this.

HMRC has specifically stated that this facility will not be allowed for contractors under the new rules. Yes, individuals will be able to claim tax relief on their contributions, but not directly through the fee payer in the same way as an employee could.

I know that NIC rules have changed over the years and they are a bit of a minefield, especially considering and individual's SERPS position. But the deduction of pension contributions from gross before further calculations has always been a fundamental provision. That's why we are taxed when we receive our pensions, because it suits HMG that way.

Additionally, if an employer makes a contribution to an employee's pension fund, then those contributions can be set off against the corporation tax bill. None of these provisions will be allowed under the new rules.

[webberg]

because tax and NIC are calculated after the deduction of the pension payment and this will not be allowed for an inside IR35 contract. I'm not sure why you are asking me this question.

Ah I see.

Your assumption is that the payment from the end client/agency - inside IR35 - is going to the PSC and that there is an obligation upon the PSC to make deductions.

However the PSC has made a pension payment thus reducing the tax and NIC.

The PSC is making the pension payment.

Is that correct.

[JohntheBike]

And how does an employee offset NIC by making a pension contribution?

because tax and NIC are calculated after the deduction of the pension payment and this will not be allowed for an inside IR35 contract. I'm not sure why you are asking me this question.