Contractors’ Questions: How much in income terms will April’s IR35 changes cost me?
Contractor’s Question: What’s the minimum and maximum dent to take-home pay for PSCs whose engagers have ‘cease and desist’ PSC models in place due to the incoming Off-Payroll Tax? Is there any way to actually earn more than when I was a PSC?
Expert’s Answer: By ceasing to use their limited company and being paid via an agency payroll or umbrella company, which is likely as a result of the engager’s PSC model you cite, a contractor will face a take-home pay reduction, typically ranging from 15% to 25%.
But beware –the reduction could be much higher if you have a significant amount of travel and accommodation costs which you pay out of your contract rate. It could also be higher in the instance that you are a high earner and have appointed an additional shareholder to minimise the impact of the higher rate tax.
The major costs factor you’ll be up against is costs associated with employment (predominantly Employer NIC but also those from the Apprenticeship Levy and pensions), and the ‘limited company contract rate’ offered by the agency versus the ‘PAYE rate.’ It is therefore worth a conversation with your agency, regarding a rate increase, although securing more money from your engager is, of course, by no means guaranteed.
Unfortunately, there aren’t many tax planning options available to reverse the reduction. Things to consider would be the use of pension contributions and perhaps keeping your PSC in a dormant state, to use if you are able to find a contract which is outside IR35.
If you wish to place your company in dormancy, you should speak to your accountant, as this will normally trigger lower accountancy fees. At this point, you also need to consider the best tax strategy. If you have funds in your company, it is likely that this strategy will involve assessing your PSC’s payroll, reviewing your company pensions strategy, together with ensuring that as a minimum, you benefit from your £2,000 dividend allowance each tax year.
And you don’t ask about, but you might also need to consider Value Added Tax if you're trying to gauge your future financial situation. Fortunately, VAT is a neutral factor -- in terms of take-home pay, unless you qualify for a beneficial rate under the Flat Rate Scheme. In our experience however, most contractors don’t benefit from this scheme due to changes in the FRS rules in April 2017. However, if your turnover dips below £83,000 a year, you could consider VAT deregistration.
From a practical point of view, retaining a company in its dormant state saves or defers the costs of closing the company down and also saves the cost and time of setting a new one up.
If at some point in the future, you decide that you wish to work via a payroll or via an umbrella on a permanent basis, then this is the time to consider closing your company. The basic premise here is that accounts are prepared to the date of cessation and all company liabilities are settled -- any remaining funds can then be distributed to the shareholders. If you continue to hold significant amounts, there are tax efficiencies to be had by way of capital distribution. However, there is specific criteria that needs to be met – for instance, the capital distribution to the shareholders needs to be made within three years of the date of cessation.
The expert was Matt Fryer, group compliance director at Brookson Legal.