Understand the impact of Off-Payroll (IR35) on your net income
NOTE: The tax calculations under the old Off-Payroll legislation are different, and are higher for the contractor.
Please use our IR35 Calculator if you wish to
calculate your tax under the old legislation.
Tax calculation for a hourly contract rate of £25,
working 37.5 hours per week, 44 weeks per year,
generating annual billings of £41,250 with expenses of £3,000. Tax code 1250L;
Fiscal Year 2020/2021
- Your total annual contracting fees are £41,250.
- After your expenses of £3,000, your gross earnings are £38,250
- Your current net monthly income after taxes is £2,596.
- If you are assessed as a deemed employee ("inside IR35") then your earnings are treated as employment income (i.e. like a salary).
Your monthly net income then decreases £205 (7.90%) to £2,390.
This assumes that the client/agency are paying their own employment taxes, and not passing them onto you.
- Your client/agency ("fee payer") must also pay extra monthly Employers NI (13.8%) of
and monthly apprenticeship levy (0.5%) of £17
on top of your agreed contract rate.
These additional annual employment taxes due by the hirer are £4,686.
- The total client/agency annual hire cost increases by £4,686 (11%) to £45,936.
- You will need to increase your rate by £2 (8%) to £27, in order
to earn the same money as before. This includes funding your expenses out of post-tax earnings.
This also assumes that the client/agency are paying their own employment taxes, and not passing them onto you.
- If your client tries to deduct their new employment taxes of £4,686 from
your agreed contract rate, to keep their costs the same, perhaps by forcing you via an umbrella scheme, then:
- This is an effective reduction in your rate of £2.48 (9.94%) to £22
- Your net monthly income will also reduce by £437 (16%) to £2,158. That's £5,248 per year.
- To earn the same as before you will need to increase your rate by £5.13 (20%) to £30.
- To earn the same net income via permanent employment would require an annual salary
- Summary of rates required:
£25 - outside IR35 / off-payroll does not apply
£27 - inside IR35 + client pays their own tax bill
£30 - inside IR35 + you pay clients tax bill (umbrella used)
Note: The employment taxes paid by the client/agency ("fee-payer) should not be deducted from your earnings.
Under the original IR35 (Chapter 8 of ITEPA) this was the case, but the off-payroll rules (Chapter 10 of ITEPA) are different.
Your contract earnings are the "direct deemed payment" from which you pay PAYE and employees NI. Employers NI and App Levy is an extra cost to the hirer.
The term "inside IR35" is collaquially used to indicate if someone is considered a deemed employee.
Solutions for Contractors:
Do you have retained cash? Use an MVL to pay only 10% tax. Find out how.