CONTRACTOR FAIR DEAL
Don't let the new IR35 proposals ruin your livelihood!!
Act now while you still have the chance!
Rights, Working Patterns, Money & All That
Losing out? You Bet!

As things stand, there are a number of issues to which the current proposals pay no cognisance, with the end result that, far from benefitting from operating a PSC, a self-employed contractor will actually be far worse off than a staff worker on the same rate.

Let’s look at holidays for a start.  By law, an employer must give an employee 28 days leave per year (many give more) if that individual works five days a week.  This effectively means the employee works 232 days per year but gets paid for 260, whilst a contractor taking the same amount of leave works 232 days and gets paid for 232.  Net result?  The staff employee gets just over 12% more gross pay per annum for the same work.

What about pensions then?  The government themselves introduced the Workplace Pension legislation which requires an employer to offer all employees a pension scheme to which the company must contribute.  Many contractors (myself included) have set things up so their limited company contributes a lump sum to their pension every month.  That will have to stop as, under the new IR35 regime, the company won’t have any capital from which to contribute - and you can be sure neither engager nor public body will be in a hurry to contribute.
 
So there’s another major disparity; anyone working through a PSC will be obliged to pay the same tax and NI as a staff employee but wont get access to, or more accurately contributions to, a true workplace pension.
I could go on forever:

  • Maternity pay.  Permanent Staff get 90% of their weekly salary for six weeks and then £139.58 for a further 33 weeks. A contractor (if lucky enough to qualify through the complex rulings) will get just get £139.58 for the entire 39 weeks.  That could well be a significant difference.
  • Sick pay.  Most companies and public sector bodies give enhanced sick pay, at least  in the short to medium term, and pay staff full, or a significant proportion of, their salary whilst they are ill.  A contractor is eligible for SSP and nothing more.  Yet another significant difference.
  • Bonuses.  Many employers that are ultimately financed by a public sector body give their permanent staff bonuses (often very substantial bonuses) for hitting  targets etc.  The contract workers who will have doubtless contributed to this success receive absolutely nothng.  Another significant difference then?


HMRC’s Flawed Assumptions

In all the payroll examples that the government has published they state that “the public sector body pays the employer NI”.  Who are they trying to kid?  They know full well this won’t happen.  Public sector bodies have already had their budgets slashed and there’s no way their management will be willing to accept an uplift of over 10% on contractor costs. 

What will actually happen is the engager will make a deduction from the top line of the contractor’s invoice and set it aside to pay the Employer’s NI, which is the way agencies already operate for contractors who don’t have a Limited Company. 

So what does this mean in real terms?  Read below……..and weep.

THE STAFF EMPLOYEE

John is a member of staff for a public sector body and earns £800 a week before deductions.  He pays £117.69 Income Tax, £77.40 Employee NI and his employer sends £88.87 Employer NI contributions to HMRC.  He’s elected to pay 0.8% of his gross into his workplace pension so his employer is legally obliged to chip in a further 2.0%.  He receives £598.51 wage into his bank and, after HMRC have boosted his personal contribution by 25%, his pension fund gets a total of £24.00.


THE CONTRACTOR

Andy also works for the same public sector body and earns £800 a week but he’s a contractor working through his PSC via Engager Ltd.  Engager Ltd are thus responsible for his tax and NI deductions. 

Andy invoices Engager for £800 but they immediately deduct £78.09 from his 'top-line' to cover his Employer NI , leaving a taxable income of £721.91.  He pays £102.07 Income Tax, £68.02 Employee NI and Engager send the £78.09 they’d set aside for Employer NI to HMRC.  Andy also pays 0.8% of his gross into his pension but receives no employer contribution as he isn’t employed by Engager and his own PSC has no capital.  He receives £546.04 wage into his bank and, after HMRC have boosted his personal contribution by 25%, his pension fund gets a total of £7.22.

Depressing reading isn’t it?  Both John and Andy start off with £800 but because Andy works as a contractor he takes home £34.47 less each week with his pension losing out by a whopping £16.78 each and every payday.

But it gets worse.  Let’s assume they both take the same amount of leave in the year,  Because John is paid for his holidays, the total paid into his bank per annum is £31,122.40 whereas Andy gets paid for 46.4 weeks and, allowing for a small tax refund, takes home £26,144.80.  And when it comes to pensions it’s worse still; they’re both contributing 0.8% yet John’s fund receives £1,248.00 whilst poor Andy’s fund gets just £334.97.

Over the year, John takes home £4,977.60 more than Andy and his pension fund gets £913.03 more contributions. Level playing field?

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