IR35 changes could strangle the living standards of the self-employed

The government is consulting on rolling out IR35 to the private sector, following on from changes it implemented in the public sector in April 2017. IPSE is adamant that this inhibiting, anti-business policy would squeeze the living standards of the self-employed and could result in losses of on average £14,000 for contractors.

To reach this figure, we took both the average day rate and weeks worked from our latest Confidence Index (the average day rate being £430 and the weeks worked 42 over a year).

If a contractor is deemed ‘outside IR35’ their profits will be subject to Corporation Tax of 19 per cent. The remaining figure will be subject to Dividend Income Tax if the shareholder extracts the money from the company. Dividend Income over £2,000 – reduced 60 per cent from £5,000 – is taxed at rates of 7.5, 32.5 and 38.1 per cent.

Using the average day rate and weeks worked data we can see that an individual operating outside IR35 would be subject to Corporation Tax of £15,366 and Dividend Income Tax of £11,402.16. This equates to a tax liability of £26,768.16.

If the engagement is deemed ‘inside IR35’, the same contractor would pay £24,076 in Income Tax and £5,410.12 in Employees NICs. This equates to a tax liability of £29,486.12. The difference between being a contractor via a limited company and paying employee taxes is not that significant.

However, the issue comes on the ‘employers’ side for tax purposes. Contractors often find themselves forced into umbrella companies.

The umbrella company will have Employers NICs and the Apprenticeship Levy to pay. Both deductions, however, are passed on to the contractor who will lose a further £11,160 in Employers NICs and £558 due to the Apprenticeship Levy.

The end result is that the contractor is over £14,000 worse off per year, but the bulk of this is made up of the Employers National Insurance.

If you are as concerned about this as we are, please write to your MP and let them know how much this will impact your business and your family. Thanks for your help.

Meet the author

Tom Purvis

Political and Economic Adviser