Preparing your finances for IR35 changes

Changes to the rules for off payroll working in the private sector (IR35) are fast approaching. The reforms will have radical implications for the way private sector businesses interact with the UK’s contractor workforce. More concerning, perhaps, is the impact IR35 will have on the tax arrangements of the contractors themselves. Depending on personal circumstance, if an individual gets caught out by the new legislation, it could have a significant influence on their financial picture. Here, we answer your questions about IR35 and what it could mean for you and your finances.

What is IR35?

IR35 is a tax law that targets ‘disguised employment’. A disguised employee is someone who falsely positions himself or herself as a limited company contractor. This often results in them paying less tax, something HMRC considers as tax avoidance.

The term IR35 derives from the reference number for the press release that announced it back in 2000. The legislation concerns freelancers and contractors who provide their services via Personal Service Companies (PSCs). Its aim is to help determine whether contractors are working through their limited companies legitimately.

If a contract meets certain criteria then, under IR35, the earnings of the PSC will be considered a ‘salary’ on which Income Tax and National Insurance contributions (NICs) are payable. Where such conditions are met, the contract gets deemed ‘inside’ IR35. On the other hand, if the same conditions are not met, the contract is ‘outside’ IR35. Here is an example of how IR35 works in practice:
  1. A contractor provides services to an end client via their PSC.
  2. The contract between the two parties stipulates that the contractor should follow set processes. They should complete company training and need to provide the service themselves.
  3. The client provides regular work to the contractor. The contractor also gets a company email address and even a company laptop to complete assignments.
In these circumstances, HMRC are likely to deem that the contractor is inside IR35.

What changes are being made to IR35?

Following similar reforms to the public sector three years ago, changes to IR35 in the private sector come into force this April [2020]. The new rules will transfer responsibility for assessing the IR35 status of a contract from the individual performing the work through a PSC to their end client.

This means that every medium and large UK business in the private sector will have the responsibility of setting the tax status of the contract workers whose services they pay for. These changes will ensure that people who work in the same way as an employee, while billing for their services via a limited company, pay the correct amount of employment tax. So, unless your end client is a ‘small business’ you, the contractor, will no longer be responsible for assessing the IR35 status of your contract.

Therefore, those deemed inside IR35 will get taxed in the same way as an employee. Despite this, though, they may not receive the statutory benefits associated with employment.

How can I prepare for the IR35 changes?

As well as what it could mean for your taxes, it’s important to consider the wider implications of your IR35 status. It’s important to get your affairs in order before the deadline of April 6th.

If you are to switch from being self-employed to a positon of employment, there are many things that could be affected. This includes your:
  • Life insurance policies
  • Income protection policies
  • Pension contributions
  • Private medical insurance
Going back onto a payroll might also mean you’re treated differently for financial products like mortgages.

At Danbro Financial Planning, we can help contractors like you assess your financial arrangements. We are independent financial advisors and, as part of the Danbro Group, we’ll point you in the right direction should you need to use the services of our accountancy or umbrella departments. It’s because of our unique position that we’re able to look at IR35 in a different way to regular financial planners.

Umbrella Companies & IR35

There’s plenty of information on Danbro’s exclusive hub about what to do if your contract is inside IR35. One such option is to utilise the services of an employment umbrella company.

Why? Well, if you’re employed by an umbrella company, you will not be subject to IR35. The legislation targets contractors who should be being taxed as employees, but aren’t. So, it does not apply to umbrella company employees.

By working through an umbrella company, you’ll become an ‘employee’. This entitles you to statutory rights like holiday pay and maternity / paternity pay. You will also have the asset of continued employment. This is particularly useful when accessing financial products at more attractive rates.

Danbro are experts in IR35 and the benefits of joining Danbro’s employment umbrella are ample. You’re entitled to:
  • Online timesheet portal
  • BUPA Cash Plan*
  • Danbro One pension scheme
  • Public Liability, Professional Indemnity & Employers’ Liability insurance
  • Discounted Self-Assessment tax return
  • Dedicated customer care team
  • No set-up costs, no exit costs, no tie-in period
*Terms & Conditions Apply

‘Clarity and structure’

Whilst it may cause a certain amount of contractual upheaval for some, April’s changes represent a big opportunity to reflect and review your plans and provisions.

So, to make sure you’re prepared for what’s to come, here’s Danbro Financial Planning’s Director, Liam Winstanley, to explain why now could be the ideal time to speak to an independent financial advisor.

“Historically, contractors who’ve been working through their own limited companies have funded items such as pension contributions, relevant life insurance and income protection cover through their companies. This was often done tax efficiently as an allowable business expense. Additionally, they may also have secured contractor mortgages and built up significant reserves in the business. This would leave them able to put together a long-term financial plan around their continued contracting activities.”

“Should their end clients’ decide that they’re inside the IR35 rules, they may be questioning ‘what to do’ with their limited company and the funds therein. They might also consider how to deal with any pension or protection plans that the Company is paying for them. And, as they will likely be paying more in taxes, how continuing to contract via an umbrella company will impact on their existing arrangements and future plans.”

“In other words, their existing financial plans may no longer be suitable. In which case they’ll require a revisit.”

“Working with an expert independent financial advisor can help bring clarity to these issues. They can help re-structure your plans where required. So, your plans and provisions will remain suitable, tax efficient and able to meet your long-term goals.”

Understanding your business

We understand IR35 and what it could mean for you as a self-employed person. This means we’re perfectly placed to advise you on your options, saving you time, effort and money. Get in touch today and discover what Danbro Financial Planning could do for you.

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