Introduction
There is a significant financial impact for contractors caught by IR35.
Contractors caught by IR35 also argue that they pay far more tax than normal
employees without receiving any of the benefits of employment. The example below shows that, in real terms, contractors pay an extra 12% more tax than their equivalents in permanent employment.
Example
A fictictious contractor, Mr Worried, had his contract reviewed and found that there were factors making the contract fail IR35. Lets suppose his revenue and expenses are as follows:
...contractors pay an extra 12 percent more tax than
their equivalents in permanent employment.
| Revenue: |
£75,000 per year |
| Salary: |
£10,000 per annum |
| Legitimate expenses: |
£3,000 |
| Tax allowance: |
£4745 |
Tax Calculations Under IR35
Deemed payment :
£51,042.
Effective gross income : £61,042. [salary + deemed payment]
Net Income: £41,155
Total tax:
£27,094
The tax bill for Mr Worried under IR35 is 45% of his effective gross
income.
Tax Calculations as Permanent Employee
If Mr Worried was a permanent employee earning £61,042 his figures are:
Gross Income: £61,042
Net Income: £41,155
Total tax:
£19,885
The tax bill for Mr Worried in an equivalent permanent position
is 33%.
[Note: The cost to the employer is £70,000 since Employers NI of
around £8970 is applied before Mr Worried gets his salary of £61,030.
Further, the company will pay more due to additional benefits. e.g.
health.]
Conclusion
The calculations show:
-
a contractor earning revenue of £75,000 per year pays around 12% more tax
than their equivalent in permanent employment.
-
the cost to the company of hiring either a contractor or a permanent
employee is the same when benefits are taken into account.
-
the tax raised by the treasury is about the same in both scenarios.
However:
-
permanent employees get extra benefits: sickness pay, personal development, training and pensions.
-
contractors get no benefits and have to fund their own personal development.
You can calculate your own figures using the IR35 Calculator and the IR35 Taxes Calculator.
Published: Monday, June 05, 2006