This article is more than 6 months old
It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.
New rules could mean thousands of contractors will pay more tax from April 2021. Financial adviser, Steve Nowosad, provides his take.
This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.
It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.
The new rules affecting thousands of contractors and freelancers were due to come into play in April 2020, but have been delayed by at least a year. The move to delay is part of the broader measures the Treasury has announced to help support the economy through the coronavirus outbreak.
While we can still expect the changes to happen on April 6 2021, it’s a very welcome delay as it gives everyone affected more time to prepare.
Under the current rules, contractors have to decide if they’re employed directly or through their own limited company.
The new rules will shift this decision to the employer.
What I’ve found from talking to my clients is that lots of contractors are still prepared to continue working through their own limited company – controlling their projects and not being entitled to the same full range of benefits as a direct employee. However, employers tend to be naturally cautious. Many could choose to only offer contracts as a direct employee, as they’re worried HMRC could review a case and decide that the contractor should have been classed as an employee after all.
If you’re not sure whether you’ll be impacted, there are three main tests to check if you fall within IR35:
The impact for many people is that they’ll lose control of how they’re paid. Around 170,000 individuals could be affected by this change.
Runs a limited company | Direct Employee | |
---|---|---|
How do you get paid? | You can pay yourself a lower salary and the rest as dividends, which are taxed at a lower rate. | You will likely be paid under Pay As You Earn (PAYE). This means earnings will be classed as salary, which is subject to higher rates of income tax than dividends. |
Pension Contribution | You can make an employer pension contribution, which can be a deductible business expense and the payment is made before tax is deducted, so full tax relief is achieved at outset. | You may be able to sacrifice some of your salary directly into a pension as a gross contribution. If not, you may be limited to making a personal contribution from net pay. This means only basic rate tax relief is claimed inside the pension. Any further relief from higher rates of tax must be claimed through a tax return. |
Let’s consider an example for a contractor who currently has a benefits package of £72,100 a year, compared to that of a direct employee with the same total benefits package.
Outside of IR35 | Inside IR35 |
---|---|
Salary paid of £12,500 | Gross salary of £70,000 |
Employer pension contribution of £10,000 |
|
£49,600 taken as dividends | No dividends |
Take home net pay of £55,040.84 and £10,000 in a pension | Take home net pay of £47,105.84 and £5,600 in a pension |
Please note these examples are based on a rest of UK taxpayer this tax year (2019/2020). Tax rates and bands are different for Scottish taxpayers.
This is a big difference of £7,935 less in take home pay and £4,400 less in pension contributions.
But direct employees may well have access to more employee benefits, which could reduce the difference.
Please note, the example does not consider the payment of employer’s national insurance contributions or corporation tax on company profits.
If you think you could be affected by IR35 one thing is certain, the sooner you act the better placed you will be to reduce the potential impact. We understand it can be complicated, but financial planning can be well worthwhile.
Tax rules are constantly changing and their benefits depend on your circumstances. Our specialists can make sure you’re up to date and are making the most of your personal allowances. We can advise you on how to make use of your tax allowances through financial planning but if you need complex tax calculations or advice on how the new rules will affect you, we recommend consulting an accountant.
We won’t waste your time or money. Book your call back and we’ll help you understand whether you could take action and if we can help. If it’s right for you, we’ll book your free initial consultation with a financial adviser.
There’s no pressure to take advice, but if you choose to do so there will be a charge, which we’ll discuss with you.
This article is not personal advice. Unlike the security of cash, investments fall as well as rise in value so you could get back less than you put in. Once money is in a pension you cannot usually access it until age 55 (57 from 2028).
This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.
Sign up to receive the week's top investment stories from Hargreaves Lansdown. Including:
The headline grabbing National Insurance cut might look like good news, but the tax burden is still set to be the highest it’s been since the Second World War. Here’s what’s changed and what you can do to reduce your tax bill.
30 Nov 2023
4 min readWe’ve paid a staggering £189 billion in tax in the last 3 months. Here are 6 tips to pay less tax.
21 Jul 2023
3 min readThe 2022/23 tax year ends tomorrow at midnight. We use Google Trends to see if people are looking at Cash ISAs or Stocks and Shares ISAs.
04 Apr 2023
6 min readDo you work for yourself? Here are some of the key allowances to take advantage of before the end of the tax year on 5 April.
03 Apr 2023
6 min read