Hi! Confused on Contracting Hi! Confused on Contracting
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  1. #1

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    Default Hi! Confused on Contracting

    Hi,

    I have been offered a contract role in my current job but I cannot quite make out whether it is worth the hassle.

    Currently I am earning around 45K on a temporary contract with the same company (through a umbrella company).
    Due to increased responsibility and work, the company has offered direct contracting (from company's point of view they would be paying similar or less) as form of "pay increase".

    They have offered 350 daily rate. And I am quite confused on how to calculate earnings through contracting. It seems the general idea is to have lowest possible wage and pay the remainder as dividends . But as I am married (wife doesnt work) and rent, there is fair bit of expenditure every month which may mean I would not be so tax efficient?

    Also, would I be falling under IR35? There is a colleague who have been offered the same conditions and his view is that we wont be as we were on temp contract before...

    Kind regards,
    Jay

  2. #2

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    IMO Yes it is likely you would fall inside IR35. You are doing exactly the same as you were while you were inside so will be very difficult to prove you are outside. All you are doing is being remunerated differently so most likely you'll fail the tests.

    The difference between being and inside and an outside contract goes well beyond your method of remuneration. Your whole engagement method needs to change which includes the way the client treats you.

    You could argue its nice of the client to offer to take you on direct instead of via a brolly but to class it as a raise is a bit cheeky. All they are doing is allowing you to reduce your tax liabilities. Hardly rewarding you for the increased responsibilities you mention. I guess if the extra money in your pocket is your only driver it could be a reward but it's a pretty sly way of doing it.

    If you are going to attempt to go direct you are going to have to learn a lot of about contracting and fast. Newbie guides to the right will help you
    Last edited by northernladuk; 19th March 2019 at 09:07.
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    See if they are willing to make an 'outside IR35' determination on the new contract and stand by it come next April (when IR35 rules applying to private sector are likely to be brought in line with those currently in the public sector), so if HMRC later find they are taking the piss it's them that will pay the tax, probably.

    Look into what makes a contract outside IR35 so you can see if the actual working practices can be massaged to fit, so in the likely event that HMRC backtrack and go after the contractor instead of the client (or agency if one was involved) further down the line (retrospectively) you can fall back on not having to rely on the client to know what's what and sleep easier knowing after contact review and back-up of IR35 investigation insurance you've done as much as can reasonably be expected to cover yourself.

    Re Ltd vs Umbrella, unless defo outside IR35 and claiming substantial travel expenses (i.e. working away from home) then don't rely on Ltd being significantly better financially than Umbrella route. Tax rules around Ltd are always being tweaked. e.g. Ltd divi tax that itself is relatively new has already had the tax free threshold reduced from £5k to £2k.
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    Ermmm... It's nothing to do with how much you earn. Your employer is doing this to lose their liabilities for employers NICs, notice periods, pensions provisions, training, career support, holiday and sick pay and a lot of other lesser but valubale costs.

    If you want to go contracting, do it with a new client. All this offer is doing is saving your employer a lot of money and exposing you to a lot of risk.
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    You lose all the things Malvolio points out, and have additional expenses. On a daily fee of £350, you shouldn't expect much more than about £41K net take home pay per year.
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    Quote Originally Posted by NotAllThere View Post
    You lose all the things Malvolio points out, and have additional expenses. On a daily fee of £350, you shouldn't expect much more than about £41K net take home pay per year.
    Really? Please explain.

    20 working days per month = £7k.
    12 months at such = £84k (With this calculation, there are still four weeks' holidays inc all the bank holidays)

    Even with no expenses, pensions, other deductibles, you'd take home a damn sight more than £41k. Both Corp and Personal tax would/could come in at under £20k.

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    Quote Originally Posted by simes View Post
    Really? Please explain.

    20 working days per month = £7k.
    12 months at such = £84k (With this calculation, there are still four weeks' holidays inc all the bank holidays)

    Even with no expenses, pensions, other deductibles, you'd take home a damn sight more than £41k. Both Corp and Personal tax would/could come in at under £20k.
    Don't factor in 12 months. That's an absolute best case and not a reliable figure.

    Contracting and perm/temping are such different animals you can't do a like for like. You have to factor in the nuances of each and time on the bench is one of those things that will happen so has to be part of the equation to get a realistic(ish) figure.
    .
    Last edited by northernladuk; 19th March 2019 at 11:26.
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    Quote Originally Posted by northernladuk View Post
    Don't factor in 12 months. That's an absolute best case and not a reliable figure.

    Contracting and perm/temping are such different animals you can't do a like for like. You have to factor in the nuances of each and time on the bench is one of those things that will happen so has to be part of the equation to get a realistic(ish) figure.
    .
    Out of interest, what figure do you use? I've done some back-of-the-fag-packet calculations using 10 months, but sometimes this feels a bit overly generous.... Still trying to find the sweet spot in regards to what I should take in terms of dividends over and above salary payments.

    To the OP - that's a terrible deal. They're essentially removing your rights and lowering your tax bill in return for a promotion, but not only is it on dodgy ground re.: IR35 as people have said, but I'd wager you'd be much worse off in the long run.... Personally, I'd ask for the expected payrise on the same terms as you're on.

    If the idea of contracting appeals via a ltd. company, think about a move elsewhere, but if you've got the opportunity for a promotion to boost your CV, there is a long-term financial benefit of that (assuming they'll agree to giving it to you on the right terms). I actually think what they've offered is a tad unfair, as they're baiting you with benefits that they're not paying for, and something that HMRC would undoubtedly frown upon.

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    The boring old ((salary / 1000) = hourly rate) estimation will give you a starter for 10. That indicates roughly what you charge gross to get the same net pay in your bank account over a year. £45 an hour is roughly £340 a day.

    It is very very approximate, but it does give a sense check.

    As an aside, in 20+ years as a contractor, I've averaged 7 months a year earning an income...
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    Quote Originally Posted by simes View Post
    Really? Please explain.

    20 working days per month = £7k.
    12 months at such = £84k (With this calculation, there are still four weeks' holidays inc all the bank holidays)

    Even with no expenses, pensions, other deductibles, you'd take home a damn sight more than £41k. Both Corp and Personal tax would/could come in at under £20k.
    assuming 12 month contract
    assuming no expenses
    assuming no pension
    assuming 20 days holiday
    assuming no other time off
    assuming starting at the start of the new tax year

    It's more like £57k take home. That's a lot of assumptions.
    It's more cash, but not a 'damn sight more'.
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