Your Payment Options if You’re Caught By IR35
How Can You Maximise Your Take-Home Pay if You’re Caught By IR35?
If you’ve received an ‘inside’ IR35 SDS, it doesn’t mean you have to stop contracting or close your PSC forever. In this article, Chris James, Director of Accounting Services at JSA and Chairman of the FCSA, explains your payment options and other financial implications to consider if you’re caught by IR35.
The temporary employment market has been massively altered by the implementation of the Off-Payroll rules, sometimes known as IR35. A few months on, some end clients remain over-cautious about using limited company contractors, issuing cautious ‘inside’ SDSs or imposing blanket bans on PSCs while they become accustomed to the reforms and understand how HMRC will manage compliance expectations. We predict that the market will begin to ease as hirers start feeling the impact of the lack of ‘outside’ contractors. However, in the meantime, there will likely be situations where you’re required to work ‘inside’ IR35. If this is the case, there are many options available to you to help you maximise your take-home pay.
Sometimes, it may be appropriate to negotiate rates with an end client who has issued you an ‘inside’ IR35 SDS to help make up some of your take-home pay. While this can be a difficult conversation to broach, it is always beneficial to have transparent discussions about pay with your end client, even if they do decide not to amend your rate. Though hirers may be fixed on their rates now, they may become more flexible and willing to negotiate pay rates as they feel the market impact of IR35.
Employment / PAYE Roles
You may decide that until the market settles, you will work via an “employed” or otherwise “PAYE” role. If this is the case, ensure you register online with HMRC as an individual and regularly check that your payroll deductions appear on your account accurately within a few weeks. It’s important to keep on top of this to ensure you’re being paid and taxed correctly.
If you can’t see the correct payroll deductions or see deductions you don’t recognise, you must ask your employer to explain the discrepancy or recalculate the deductions. In some cases, individuals are being presented with a payslip that is compliant with HMRC’s tax requirements, but the employer or deemed employer is paying incorrect amounts of tax, causing the individual to be liable for incorrect and unpaid tax. You can avoid this by keeping an eye on your HMRC account to ensure your supply chain is acting compliantly.
The most common option for ‘inside’ IR35 contractors is to work via a compliant Umbrella company, such as JSA Umbrella. Working this way is simple and easy. You become an employee of the Umbrella company, which will then take care of all your tax and compliance obligations and provide you with a range of employment rights.
In some circumstances, your supply chain may not feel able to approve you working ‘outside’ IR35 through a limited company, due to the Off-payroll rules, but they may be happy with the idea of you working as a self-employed individual instead. In these situations, similar employment status rules apply but the way they operate and where the liability for underpaid tax might fall is different.
If this option is available, before making this decision, you should seek advice from a specialist contractor accountant, like JSA Group.
If you’re operating multiple contracts or you know that you’ll continue working ‘outside’ IR35 in the future, it’s helpful to find a service that accommodates a mixture of PSC and Umbrella working. Our IR35 Switch service allows you to work flexibly ‘outside’ IR35 where possible but operate compliantly ‘inside’ where necessary.
When we’re your limited company accountant, if you’re deemed ‘inside’ IR35, you can work compliantly through JSA Umbrella for no additional cost while you rest your PSC. When you’re ready to take on an ‘outside’ contract, you can switch back to your PSC and resume paying yourself through a mixture of salary and dividends.
This allows you to take on ‘inside’ contracts while the market recovers, without making any permanent changes to your working structure. Plus, it enables you to have all your finances looked after in one place, no matter your employment status.
“Deemed” Employment through Your PSC
Occasionally, you can continue operating through your PSC even when you’re ‘inside’ IR35, taking “deemed” employment payments. Although this may be suitable if you’re working on more than one contract or you’ve taken a very short-term role, in most circumstances, there are no benefits to working this way. You will still be taxed the same amount as if you were working through an Umbrella company or PAYE structure, however, you will have none of the employment benefits of Umbrella employment and none of the tax freedoms of PSC working.
You can find out more about working through your PSC on ‘inside’ contracts here.
Closing Your Company
After a long time working ‘inside’ IR35, it can become increasingly difficult to operate in the same way as you did before with numerous ‘outside’ IR35 contracts. For example, taking expenses can become almost impossible if you reach the point where you’ve effectively ceased to trade through your PSC.
If this is the case, you may choose to close your limited company. Depending on your circumstances, a members’ voluntary liquidation may provide additional tax efficiency upon closure, though this will depend on the assets in your business, your personal circumstances, and your company’s trading history.
Our contractor accountants can help you if you decide that closing your company might be appropriate for you.
Look Out for Schemes & Artificial Arrangements
No matter which working option you choose, it’s vital you avoid getting caught up in artificial arrangements or payment schemes. If you’re issued an ‘inside’ SDS by your supply chain, then any solution that claims to mitigate your tax position or afford you more take-home pay than other ‘vanilla’ options (like simple Umbrella) is likely using a scheme that will trigger a personal liability as you won’t be paying the correct tax on your income. In many cases, these tax avoidance schemes occur within non-compliant Umbrella companies that claim to help you pay less tax by treating all or some of your income as a “tax-free bonus” or “loan”. To avoid getting caught up in these schemes and facing financial penalties, make sure you’re thoroughly checking the compliance of your entire supply chain, working with companies that are FCSA-accredited and dedicated to transparent pay and compliance with HMRC.
Remember, just because a company claims they’re “registered with HMRC”, it doesn’t mean their solution is safe and compliant. Any payroll provider must be “registered” with HMRC, so this isn’t evidence of a compliant solution. Before selecting any payroll provider, make sure you understand how your payment will be processed and that you recognise every party in the supply chain and your contract. If other entities are present in the chain, find out who they are and why they’re there. If you’re unsure about the compliance of a provider, it’s advisable to go elsewhere to protect yourself from risks.
Payment Options/Tax Planning
When you’re working ‘inside’ IR35, you will have more tax to pay so it’s advisable to take some tax planning advice to help you compliantly retain as much take-home pay as possible.
For example, in a typical ‘outside’ PSC arrangement, you will take your PAYE allowance during the tax year from your company as a salary. If you have other taxable income or are paying an employee, you may choose to take less. You may be able to process tax-deductible expenses and make pension contributions for yourself and your employees to reduce the company’s taxable profits. Company profits, after corporation tax, can then be drawn via dividends at a time that suits you. This is a very tax-efficient way of working.
When you’re working ‘inside’ IR35, however, the tax advantages are significantly reduced. So, if you’re continuing to manage your PSC while taking on ‘inside’ contracts, it may be advisable to reduce the level of your salary to little/nothing since taking a salary from your PSC in addition to PAYE income will quickly raise the tax band you’re in and the marginal rate of tax you’ll pay on that income.
Here to help
Although ‘inside’ working provides fewer tax and employment freedoms, there are many ways to work ‘inside’ compliantly to maximise your take-home pay without switching to permanent employment.
Whether you’re seeking a great Umbrella employer, looking for a flexible way to operate ‘inside’ and ‘outside’ contracts compliantly, or thinking about closing your PSC, it’s vital you speak to a professional contractor accountancy practice, like JSA Group, before making any decisions. Get in touch on 01923 257257 for help and advice from our experts.