Taking stock: Assessing the impact of IR35 reforms in the private sector

  • Research
  • Over a third of contractors (35%) have left self-employment since the changes to IR35.
  • Of those who remain, over a third (34%) are now working through umbrella companies.
  • One in three contractors (36%) are now working in engagements that are deemed ‘inside IR35’.
  • Of those working on inside-IR35 contracts, four out of five (80%) have seen a drop in their quarterly earnings – by an average of 30 per cent.

In April this year, government changed how IR35 self-employed tax regulations worked in the private sector, shifting the complex task of determining a contractor’s IR35 status from contractors themselves to their clients.

This move has led more than one in three contractors surveyed (35%) to leave self-employment. They have closed their companies for retirement, moved into permanent roles, begun contracting abroad or are simply not working.

Of those who remain in contracting, a third (34%) are now working through umbrella companies, eight per cent are on agency payrolls and three per cent are on client payrolls. In total, one in three contractors (36%) are now working in engagements that have been deemed ‘inside IR35’.

Working ‘inside IR35’ seems to have significant financial consequences for contractors: four out of five (80%) who said they are working ‘inside IR35’ have seen a drop in their quarterly income – by an average of 30 per cent. A quarter (25%) even said they had experienced a drop in income of over 40 per cent.

A key reason for this seems to be Employers’ National Insurance Contributions. 72 per cent of contractors working inside IR35 said they were now liable for this and were paying through a reduction in their day rate.

Those contractors who moved into permanent roles also found themselves in a less financially advantageous situation. Nine out of ten (89%) saw a drop in income – by an average of 34 per cent.

Another significant issue is clients’ approach to IR35 status. Clients are now legally obliged to give contractors an IR35 Status Determination Statement (SDS), but two out of five contractors (38%) say their clients have not done this.

Although some contractors revealed their clients had actively assessed their IR35 status, one in five (21%) said their client had blanket assessed all their engagements as inside IR35. Another one in ten (11%) said their client insisted they move onto a payroll without assessing the IR35 status of their engagement and one in ten (9%) said their client simply advertised the engagement as inside IR35.

Umbrella companies

The changes to IR35 led to over a third (34%) of contractors being moved into umbrella companies. As umbrella companies are largely unregulated, contractors’ experiences of working through them varied significantly.

Overall, just under half of contractors (46%) said they were satisfied with their umbrella company, while almost a quarter (23%) said they were dissatisfied (including one in ten (9%) who said they were very dissatisfied).

While contractors seem to be broadly satisfied with umbrella companies’ payment timings (66% were satisfied or very satisfied), they were more concerned about other areas such as their Employers’ NI arrangements, holiday pay and business expenses.

Contractors were most concerned about business expenses (55% dissatisfaction compared to 11% satisfaction – most likely because they can no longer claim business expenses). This was followed by Employers’ NI arrangements (33% dissatisfaction compared to 29%). After this was holiday pay (24% dissatisfaction to 32% - likely because of the reported practice of not informing them they are due holiday pay).

 

Read the full report here

 

Meet the authors

Chloe Jepps

Head of Research

Joshua Toovey

Policy and research officer

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