Government IR35 Rules Will Cost Half of Freelancers / Contractors £14K Per Year

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Government IR35 Rules
Government IR35 Rules

Government IR35 Rules

New Government IR35 rules are likely to cost half of all contractors £14,000 a year on average if implemented.

That is what is estimated by contractor lobbying group IPSE.

The Government have just ended a consultation period as to what to do about private sector contractors.

They have already changed the rules for public sector contractors in April 2017.

They are likely to recommend that the Government IR35 rules are changed in the private sector too.

It is most likely that the Government IR35 rules changes will be announced in the November budget and implemented in April 2019.

Self Employed Contractors v Permanent Employees

The Government believe it is an ‘anomaly’ that self employed persons earning £100,000 a year pay less tax and national insurance than a permanent employee earning £100,000 a year.

They said that they mean to ‘fix’ this.

In the public sector they changed the rules so that contractors could no longer determine their own IR35 status as they did previously.

Fee Payer Will Decide Contractor IR35 Status

This task would, therefore, fall to the ‘fee payer’ under the new Government IR35 rules.

In most cases this would be the Government department who hired the contractors.

There would be penalties on the Government department if they got it wrong.

So, they will err on the side of caution.

Check Employment Status for Tax

They used the Check Employment Status for Tax (CEST) online IR35 test  which HMRC created and which is heavily weighted against the contractor and for HMRC.

With 750,000 tests taken, it shows 54% of contractors passing the test and 46% either failing or being indeterminable – which comes to much the same thing as departments won’t take chances.

What happened in he public sector was that, rather than just paying the IR35 tax, contractors had to shut down their limited companies and join umbrella companies.

Contractors Take Home Pay Fell

So, the Government IR35 rules meant that their income fell by an average of £14,000 a year.

However, the more they were paid, the more they lost. Some locum doctors and IT Contractors claimed that they lost 30% of their income by making the switch.

That was substantially over that £14,000 a year.

By operating via a limited company a contractor may retain up to 80% to 85% of their income.

Operating via a PAYE umbrella company may mean them retaining as little as 55% to 60% depending on earnings.

It will also be the same in the private sector from April 2019 if they implement the Government IR35 rules there.

For more crucial advice on IR35 click on IR35 Tax for lots more advice articles.

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