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Public sector contractors: How to calculate your new rate if IR35 applies

With the introduction of the public sector IR35 reforms less than two weeks away, public sector bodies (PSBs) are going to extreme lengths to mitigate any potential tax liability risk.

Many organisations are reluctant to process contractors outside IR35. In recent weeks some have attempted to impose blanket bans on limited companies, making many move to trading via PAYE based umbrella companies.

Contractors in the NHS and elsewhere are being pushed into arrangements where they are having their tax deducted via Pay As You Earn (PAYE), with agencies taking on the employers National Insurance (NI) burden.

If your public sector client is attempting to push you onto a payroll, we can tell you how much to increase your rate by to retain the same level of take-home pay after taxes.

Public sector IR35 reforms: How are contractors responding?

Attempts to force contractors into PAYE arrangements haven’t all gone to plan. There are various ways in which contractors have chosen to respond:

  1. Contractors are effectively picking up the new tax bill by accepting new contracts on lower rates
  2. Contractors have increased their rates to compensate for loss of earnings to tax
  3. Contractors have declined new contracts and walked away from the public sector

“Unfortunately, contractors who have accepted contracts on lower rates are the ones in a weak bargaining position,” says ContractorCalculator CEO Dave Chaplin. “They have accepted the new terms set out by their clients for lack of a better option.

“On the other end of the spectrum we have the contractors who have upped sticks altogether. They know there is demand for their services elsewhere where they won’t be subject to punitive taxation.”

How much do you need to increase your rate by if IR35 applies?

Occupying the middle ground are contractors who have negotiated higher rates to guarantee the same income after tax. This is becoming a popular strategy that many PSBs are caving to because they can’t afford to lose out on the critical skills that their contractors provide.

If you are in a position where you can play the ‘vote with your feet’ card, the table below shows how much you would need to increase your rate by to retain your current level of take-home pay.

Current rate IR35 does not apply New rate IR35 Applies
Daily Daily Increase %
£100 £118 18%
£125 £154 23%
£150 £185 23%
£175 £226 29%
£200 £257 29%
£225 £301 34%
£250 £332 33%
£275 £355 29%
£300 £397 32%
£350 £421 20%
£400 £498 25%
£450 £595 32%
£500 £650 30%
£600 £743 24%
£700 £828 18%
£800 £974 22%
£900 £1,120 24%
£1,000 £1,229 23%

*Rates based on 46 weeks per year and an 8 hour day, using tax tables for 2017/2018

Alternatively, you can simply type your hourly or daily contract rate into our IR35 calculator to find out your new contract rate.

Why contractor rate hikes mean IR35 is a ‘tax neutral strategy’

As Chaplin points out, despite HMRC’s intention to increase its tax yield, contractor rate increases make IR35 in the public sector a largely tax neutral strategy:

“Contractors increase their rates, more tax is charged and given straight back to HMRC. Meanwhile, PSBs are forking out more for the skills they need whilst contractors end up with the same amount in their back pocket.”

This would be far from the case if the same tactic were applied in the private sector, which could see private sector firms paying a heavy price. HMRC has insisted that the measures won’t be enforced beyond the public sector. But Chaplin, like many others, is sure a public sector rollout is imminent.

“Despite the taxman’s denial, it’s a case of when this will happen, not if. My view is that it will see it happen either in 2018 or 2019, with a 40/60 split on the chances. But it will happen, and when it does, you can expect a backlash.”

Published: 27 March 2017

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