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How IR35 will effect your payroll solution

How IR35 will affect your payroll solution

A key decision you will need to take when you decide to contract is how you’ll be paid. There are two options: being employed via an umbrella company or forming your own limited company. However, a piece of legislation that has been in force since 2000 is due for an overhaul and will have a major effect on your decision. The legislation is IR35 and the changes being brought in are radical.

One of the main benefits of contracting via a limited company is that it’s a tax-efficient way to operate. Unlike a permanent or umbrella employee, contractors pay themselves in the form of a low basic salary, with the remainder drawn down in the form of dividends. Dividends are not subject to National Insurance Contributions, which results in a tax saving, although this was significantly reduced following an overhaul of the dividends tax rates in 2016.

If you set up your own limited company, you’ll become a company director. This means that you will have a number of statutory and financial obligations, such as submitting annual accounts to Companies House, running the company responsibly and meeting your HMRC tax deadlines. Fortunately, most of the paperwork involved in running a limited company can be taken on by a specialist contractor accountant, who can also take care of forming the company for you.

However, if your contract work is subject IR35 tax legislation, the benefits of contracting via your own limited company are vastly reduced. Changes to off-payroll working came into the public sector in 2017, which resulted in a large number of contractors being classified as ‘inside’ IR35. These changes will also apply in the private sector from April 2020. After April 2020, in both the public and private sectors, the client will be responsible for determining the IR35 status of a particular contract, while the responsibility for deducting tax and national insurance contributions will rest with the fee payer.

If the contract falls ‘inside’ IR35, it may be worth attempting to renegotiate the terms with the client. However, if the client isn’t open to negotiation, then it may be better for you to work via an umbrella company. By joining a PAYE umbrella company, you’ll become an ’employee’ of the scheme. The client pays the scheme when you’ve submitted a weekly or monthly invoice, and you will receive a salary after deductions for tax, National Insurance, expenses, the umbrella fee, and any other pre-agreed costs. Although this is not as tax efficient as a limited company structure, it gives contractors a hassle-free option that takes care of paperwork, tax administration and IR35 liability.

At the moment, if a contractor works in both the public and private sector, it’s likely that they will undertake projects that will be a mix of those caught by IR35 and those which are not. Equally, when IR35 reforms apply to the private sector in 2020, contractors might find that some of their assignments are deemed inside IR35 by the client, while some are not. Variations in client preparation for the changes in the private sector will inevitably result in another transition period.

In these circumstances the contractor should be aware that the two payment structures are not mutually exclusive. The contractor may wish to keep their limited company open to allow them to continue to trade through it and benefit from drawing dividends on the non-IR35 caught assignments. Indeed, there may be some instances where putting the limited company into a ‘dormant’ state could be helpful if they take an assignment which is currently outside the public sector, or subsequently outside IR35.

Contractors should keep themselves informed on how IR35 will affect off-payroll working and prepare themselves for the changes ahead. For an overview of the changes to date, you can download our IR35 guide here.

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