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IR35 Public Sector Examples

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)

Result wise:

  • 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