The Association of Independent Professionals and the Self Employed (IPSE) calculates that the proposed extension of reformed public sector IR35 rules to the private sector would ‘strangle’ the living standards of contracting professionals by cutting their annual income by £14,000 on average.
Tom Purvis, IPSE’s Political and Economic Adviser, released calculations based on data about average day rates and average weeks worked for contracting professionals participating in the association’s latest Contractor Confidence Index.
Based on the average daily rate of £430, and the average number of weeks worked (42 per year), contractors designated as ‘outside IR35’ under the new regulations would be subject to Corporation Tax amounting to 19%. If the shareholder deducts money from the company, the remaining income will become subject to Dividend Income Tax. Any Dividend Income above £2000 (a figure the government recently slashed by 60% from the threshold of £5,000) will be taxed at rates of 7.5, 32.5 and 38.1%.
On the basis of IPSE’s average day rate and weeks worked data, Purvis computes that contractors designated as outside IR35 would be liable to Corporation Tax of £15,266 and Dividend Tax of £11,402.16 – a total tax liability of £26,768.16.
For contractors deemed to be inside IR35, the financial hit is likely to be worse. Using the same average data, contractors designated as inside IR35 would have to pay £24,076 in income tax, and £4,410.12 in Employees National Insurance Contributions. The resulting tax liability amounts to £29,486.12 – not appreciably different from that required of an outside IR35 contractor working through a limited company.
This is not the end of the story for inside IR35 contractors, as employers operating under the new rules in the public sector have frequently pressurised independent professionals into working via Umbrella Companies.
Although there are benefits to contractors using this vehicle (Umbrella Companies offer full statutory employment benefits, including paid sick leave, holiday, and maternity/paternity leave), Umbrellas must pay Employers NICs and the Apprenticeship Levy. Both deductions will be passed on to the contractor, amounting to an extra income loss of £11,160 in Employees NICs and £558 for the Apprenticeship Levy.
For the thousands of freelancers choosing this method of working, who have established a good standard of living because they are happy to pay for the Umbrella benefits, this is acceptable. Less so for those who have already established a standard of living based on the limited company route.