Dear Contractor Doctor,
I am currently employed full time and have been offered some contract work by a previous employer. My current employer has no issues with me undertaking the work so long as it does not affect my current workload.
I am currently negotiating formal contracts with my previous employer to provide services on a part-time, out of office hours basis.
Are there any issues I need to be aware of with regard to contracting while still being employed full time?
Kindest regards,
Peter Hobbs.
Contractor Doctor says:
There are a couple of aspects to consider that are interlinked: IR35 and Payment structures.
IR35
Maximising your income by minimising your tax will depend on the exact nature of the contract between yourself and the previous employer with respect to the IR35 Tax Legislation
IR35 deals with how to tax contractors who are deemed to be employees of their clients. It is possible to remain outside IR35, but requires some forward planning.
If you are inside IR35 then your income from all sources will be taxed together. You’ll have a different tax code to reflect this with the contracting income and taxes will be deducted using PAYE. You can calculate the net income and taxes due using the Permanent Salary Calculator.
If you are outside IR35 then you will able to take advantage of a limited company structure and receive your contract income via salary and dividends which is more tax efficient
The financial impact of IR35 for contractors is substantial, and the difference in take home pay between the two is considerable. You can calculate the differences by determining an equivalent hourly rate by combining the two incomes and running them through the IR35 Calculator.
Since you are not using an agency you will have more flexibility in negotiations to try and ensure your contract remains outside IR35. But bear in mind that the contractual terms must reflect the actual working arrangement.
I strongly advise you get a professional qualified and experienced law firm to review your contract for IR35 issues and negotiate changes on your behalf with the previous employer. Choose a legal firm who specialises in IR35, is qualified, has reviewed and negotiated contracts, and has a good track record of fighting cases with HMRC. The fees are negligible compared to what you can save. It is one of the start up expenses that can be claimed.
Payment structures
After determining your IR35 position you can then decide on a payment structure for receiving your income.
If you fall outside IR35 and already have an active limited company then use this for your invoicing. If you do not have a company but plan on contracting for the long term then the most tax efficient option is to set one up.
If you are outside IR35 and are a short term contractor then it will be more convenient, but much less tax efficient, to use an umbrella company. This avoids the cost of setting up your limited company and then closing down your limited company or making the limited company dormant. Previously contractor could use what were called 'composite companies' and keep the tax efficiency of being outside IR35. However, since the Managed Service Company Legislation introduced in the 2007 Budget, these are no longer a viable option.
If you are inside IR35 then you will need to use an umbrella option that offers a PAYE scheme. You can also take advantage of pensions to reduce the impact of IR35 by channelling pre taxed income into a pension scheme.
Whilst you could consider being a sole trader this exposes a risk to your client which they might not be prepared to take. See Why Contractors Cannot Trade as Sole Traders.
Good luck with your contracting.
Contractor Doctor
Published: Monday, October 10, 2005
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