Like many contractors, I never dreamed of taking an inside IR35 role. But with the availability of outside IR35 roles diminishing in light of the off-payroll reforms introduced in the private sector in 2021, I was forced to do so.

I can now understand why so many of my contemporaries have been forced to take on these engagements, with as many as three in ten engagements still on an inside IR35 basis in the last year alone – up from two in ten just two years ago.

So when I was approached for an inside IR35 role last year, I agreed with IPSE that we would try and assess whether the 50% uplift to my rate was a reasonable ‘rule of thumb’ approach to negotiating this type of work.

I have previously penned my thoughts on the convoluted supply chain and some of the odder contractual terms involved in working via an umbrella company, but for this piece I want to focus on the numbers involved (and the many deductions that come off your payslip!)

Before we delve into these numbers, I do want to add that the umbrella, one of the larger players in the market, did provide a good, reliable service in terms of paying me on time, providing helpful paperwork as well as a portal, and were accessible for queries (apparently not all succeed in this department).

I don’t think you could ever call an umbrella company an exceptional employer. They certainly do not go above and beyond for their employees from my own experience.

Below is one of the payslips they provided. The first things to be aware of are commission and holiday pay. 

An umbrella will automatically put you on a basic rate to ensure that you are at no point earning below minimum wage. Anything you then earn above this minimum is then considered ‘commission’. It looks a bit odd but I’ve been assured by IPSE that it is standard practice.

Page two of the payslip, which I’ve included below, was perhaps more helpful.

There was confirmation of the rate and number of days worked. There was also a total that matched what I expected for ‘Rate x Days’.

Then an itemisation of ‘deductions’ - Employers NI an Apprenticeship Levy and of course, the umbrella company’s fee. 

These deductions amount to 12.6% of the fees (as I have outlined previously, there seems to be little difference between umbrella company fees) even before personal PAYE and NI is applied to the remaining amount.

The fees, combined with the £1578.30 in PAYE and NI, represent deductions of 47.7%.

A big hit on that agreed fee. (For simplicity, no voluntary pension contributions are included here).

My own personal limited company continued to incur costs like insurance, lease hires, professional fees. But it wasn’t generating any income from this engagement. 

On the ‘plus’ side, there’s no Corporation Tax to pay at the end of the year because my company wasn’t making any profits.

So, are we able to answer the question of whether a 50% increase on your normal rates is sufficient to account for an assignment being inside IR35, instead of outside?

The biggest variable is how much profit your company declares at the end of the year, but, I think we can say the following:

1. A 50% increase is more than enough to account for Employer’s National Insurance, the Apprenticeship Levy and an Umbrella Fee.

    

2. A 50% increase is still probably sufficient (to account for the additional PAYE and Employee’s NI you have to pay) if your limited company pays you a salary that takes you above the basic rate tax band in a given tax year.

    

3. However, even a 50% increase seems insufficient (to account for the additional PAYE and Employee’s NI you have to pay) if your limited company only pays you a salary that keeps you within the basic rate tax band.

    

I would imagine that for many company directors, point 3 may be the most relevant.

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