Some Self-Employed Workers must now start paying tax differently after IR35 changes came into force. The private sector reform was due to take place in April 2020 but was delayed because of the Covid-19 Pandemic.
The reform will affect both the Contractors and the Companies that use their services. The IR35 reform is designed to clamp down on Contractors who in essence operate in a similar way to Employees but work through Limited Companies for tax purposes.
How do the IR35 changes work?
The IR35 reform has now taken place in the private sector on 6 April 2021. The changes largely mirror the ones that took effect in the public sector in 2017 but small businesses are not affected.
IR35 refers to the off-payroll working rules that aims to ensure that both Contractors and the Companies they are working for are paying the correct level of National Insurance contributions (NICs).
Under the reforms, medium and large private businesses will become responsible for judging whether the Contractors they use fall inside or outside the scope of IR35, rather than the workers themselves.
If a contractor provides services to a medium or large-sized private sector client, they:
- Should get an ‘employment status’ determination from the client, as well as the reasons behind that determination; and
- Have the ability to dispute the determination given to them if they disagree with it.
Under the IR35 there is no change to the rules for Contractors providing services to small businesses in the private sector.
What are the allowances for Contractors and Employees?
As a business you are liable for NIC contributions for your Employees, it is important to remember these are individuals that are included on your RT1 submission each month, therefore classified as ‘pay as you earn’ (PAYE).
- Employees of a Company must pay 12% National Insurance on earnings between £9.5K and £50.K, and 2% on earnings above this, with Employers also contributing 13.8% in payments above the £9.5K threshold for each Employee on their payroll – ‘pay as you earn’ (PAYE).
As a business, this is not the case for Contractors as they are not classified as ‘pay as you earn’ (PAYE) and not submitted on any RT1 submission.
- It is different for Self-Employed Contractors as they pay ‘class two’ NIC’s of £3.05 a week on earnings between £6.475 and £9.500, ‘class four’ contributions of 9% up to £50k, and 2% on anything above that amount.
- This, therefore, works out to a lower tax bill than if they were Employees on ‘pay as you earn’ (PAYE).
It is important to remember that Employers do not have to pay contributions for Self-Employed Workers.
Will the changes affect me?
The Government has said this will not affect people who work as genuine ‘freelancers’, it is targeted largely at Contractors who set up a Personal Service Company (PSC) and use that for their business.
Some Contractors will have their clients hire and pay the PSC, which in turn pays the Contractor.
In this instance, HMRC believes a portion of these Contractors should be regarded as Employees, and therefore be paying the same amount of tax.
As a business what should I do next?
It is essential that medium and large businesses carry out an assessment to determine whether the new rules under IR35 apply to their independent Contractors and review their contracts and pay arrangements.
Company status (medium/large) must meet at least two of the below criteria:
- Have over 50 employees; or
- Have a net turnover in excess of £10.2m; or
- Have over £5.1m on their balance sheet.
How can we help you?
We can provide you up-to-date advice, guidance, and support with IR35, we understand the implications of the changes and how they may affect you and your business.
We can provide you with the necessary Agreements should you require, this may be if you are a Contractor looking for the relevant documentation and not sure where, or what to buy, in this instance, we always advise that you do speak with us as you may find template documents on the internet, these may not be suitable, most certainly not drafted with your individual needs in mind and in many instances will not be legally compliant.
We offer complete peace of mind, our Employment Law advice is confidential, professional and our team are highly experienced.
Simply get in touch for a no-obligation chat.