Here are some examples around how IR35 reform impacts contacts in the Public Sector from April 2017, and will impact contracts with large Private Sector engagers from April 2020.
- Scenario 1 Sole shareholder outside IR35 current arrangements
- Scenario 2 60:40 Shareholding split and spouse salary, outside IR35
- Scenario 3 Traditional IR35 (the financials of moving to an umbrella will be very similar to this)
- Scenario 4 Public Sector IR35 – assuming gross rate unchanged
- Scenario 5 Public Sector IR35 – cost to engager equalised, contractor suffers rate cut
The difference between 4 and 5 is who bears the cost of the new regime – in 4 is the engager, in 5 is the contractor via a rate cut.
The examples assume £100,000 gross income and expenses incurred of £5,000 a year. The expenses are not deducted in computing take home as its assumed they are a cost that will be born regardless of how the contractor structures their business, however tax relief on them is reflected.
We haven’t included a move to permanent scenario because the variables around holidays, pension and similar are too nebulous for any sensible comparison to be made.
Vat isn’t reflected as its neutral (although a lot of people will be loosing any benefit from Flat Rate this April as well)
- Unsurprisingly Scenario 2 maximises take home.
- Scenario 1 and 4 are not vastly different as the dividend tax and employees NI are similar in their effect.
- The primary difference between scenarios 3 and 5 is tax relief on expenses and employers NI
- Scenario 5 not unsurprisingly shows the worse case followed by scenario 3