Inland Revenue Press release number 35a has been a massive pain in my life, as well as thousands of other temporary workers within the UK. Suspended for a year in 2020 due to the pandemic, it is now official, IR35 is coming into play as of the 5th of April 2021. IR35 will affect all temporary workers, especially those like me who work in the IT sector. If you have heard about this law and want to understand how it might affect you, then read on.
IR35 was originally sold as a policy to protect 'low' income workers. Big corporations were supposedly only offering zero-hour contracts whenever they needed to recruit for minimum-wage positions. This meant a company could get out of paying holiday pay, sick pay, and pension contributions. This was definitely an unfair situation for people who were in a bad situation. If you need a minimum wage job then the chances are that you are going to take any job that you can.
Asides from helping the poor, there is another side of IR35. To get a lot more tax from the middle classes. The government is estimating that it will now make 1.2 billion in extra tax due to the new IR35 law. Where does this tax come from? In the form of a disguised employee.
A disguised employee is someone who is a contractor but is in essence no different to a full-time employee. The contractor may use the company offices, the companies laptop and software. They may get free beers on a Friday afternoon and they may even get invited to the Christmas party.
Even though these contractors are only working on a temporary basis, taking all the risk for not being employed all year long and risk being fire at a moments notice for no reason, the government does not think it is fair that they treated differently than normal employees. IT contractors typically trade from their own private limited companies. Trading through a company means that ultimately the contractor pays less tax. They can give themselves dividends, they can claim tax reliefs and corporation tax is less than the 50% higher-income tax normal employees have to pay.
As a contractor of 10 years, I paid a stupid amount of tax while contracting. Over 50k in some years when you add corporation tax, personal tax, and VAT. However, the government does not think that people like me, in this situation is paying enough tax. Even though I paid corporation tax, self-assessment tax, VAT on any personal purchases I make, stamp duty to purchase a house, tax if I get left anything over 500K, tax on my savings over 20k a year, I obviously do not pay enough! As far as the government is concerned, just because an employee pays more tax than I do, I should pay more.
Some people reading this may agree with this decision, most definitely will not. The fact is that it is now law. This means that contracting, at least for the future will be harder. I work in a project-based industry, I build websites. After I have designed and built a new website for a company there is not much else for me to do. I will either become redundant, or I will get bored and job swap. A project may last up to a year. So what do I do, constantly job swap? It is also possible for me to work on many projects at the same time. Traditionally, big corporations are better to work with. They have bigger budgets, more interesting projects and you know you will get paid. Project-based sectors like mine will always have a need for contractors. So what will happen?
Inside IR35 and Outside IR35
For the last few years, there have been two types of contract, Inside IR35 and Outside IR35. A contract inside IR35 means the company hiring you is responsible for paying your national insurance tax. Most companies do not have the time and skills to do this, so they will force you into working with them through an umbrella company.
The umbrella company will take a cut of your wages, they will pay the tax for you and you will be leftover with the remains. Outside IR35 contracting will remain the same as normal. However, there are now penalties for the hiring companies who fail to adhere to the rules of what constitutes a contractor and a disguised employee.
IR35 is not applicable to all companies. Smaller companies are still exempt. I'm sure the rules will change so you will need to research this yourself from the HMRC website. If you are a smaller company, under 50 people, making less than a million, you're allowed to continue working as normal. What this means is there will be fewer outside IR35 roles moving forward and more demand for those roles. This will push the day rate down as people are more interested in working currently, compared to a few years ago of getting paid as much a possible, This is the law of supply and demand in action.
Some contractors may think they will just put their inside IR35 rates up, to ensure the contractor gets the same take-home pay. This would mean a company may need to pay a lot more for inside IR35 positions. This would work if everyone did this and there was a limited demand of people, currently, this is not the case. For most companies paying 20% more for staffing is not feasible. In today's Zoom world, offshoring is an option. Speaking from my workplace, we are now looking at offshore options as it's cheaper and easier to hire people. I'm guessing this didn't factor into the government plans. A large chunk of money from our company money which used to stay in the UK could now go to a different country. So it's a lose/lose for contractor and the government.
When comparing salaries, let us see what the difference in take-home is. This is my fag packet maths, but, it will give you a sense of the differences between perm, inside IR35 and outside IR35.
Let us use a perm job that pays a 100k salary as a base-line. This job will result in that person taking home about 6K a month. As part of the job package, you might get pensions, 25 days holiday, and sick pay.
The equivalent 6k a month takehome for an inside IR35 role would be, £600 per day. This will have no benefits at all. You would likely be on a 1 day notice period. You will also need to work via an umbrella company that will take a cut.
Finally, the outside IR35 role would need to pay £420 a day for a 6K per-month take home. For this you could use an umbrella company, however, it will make more sense to run your own private limited company. From your company, you will pay less VAT and your company tax will be less. More information on my maths can be found here, www.contractorcalculator.co.uk.
To make it worthwhile to be a contractor, you need to get paid more than a perm employee to make the risk worth it. Maybe you want 700 per day in an inside role to make it worthwhile. You might want to get paid around 500 per day in an outside role to compensate for the risk. As there are fewer outside roles now, you may spend a lot more time per year being unemployed. Maybe you want 550 a day as you now might be working less. The point is this change will negatively reduce perm, inside and outside roles as it results in more demand of workers for fewer jobs. This results in less money being spent on the economy and the government losing out.
How Has This Affected the Job Market?
I work in IT, so I can only talk about this sector. When this was announced in 2020, a lot of contractors jumped ship to perm. The intention was to get something and ride the wave out. As the pandemic delayed IR35, a lot of people found themselves in limbo. Due to the pandemic, there have been fewer jobs compared to any other year. With furlough and lockdowns, a lot of companies are not spending or investing, so they require fewer people. I have talked to many recruiters who have looked after contracts for years. Many have had to change to the perm side of the business as they were not making money due to a lack of contracts.
The job market is exactly like the stock market. Sometimes there are bull runs and everyone gets paid a lot. Sometimes there are bear runs when the prices go down and it's harder to find work. We are currently in a bear market. There are still loads of jobs out there, but you may not get the premium wage of a few years ago. Talking to recruiters, outside roles have been less frequent for the last 12 months. Another reason for fewer jobs is that a lot of places recruited and converted contractors into perms last year when the IR35 news was first announced. A lot of people have good staff that are not leaving! A buoyant job market is good for everyone as it means prices go up!
Another issue for companies wanting to get contractors is that they need to do a lot more admin and paperwork. There is now greater financial penalties for failing to adhere to the rules, so companies will be more diligent. For most contracts, moving forward it will not be as easy as before. It is likely you may need to do work for fixed-price contracts rather than a day rate. You may need to team up with a buddy and get a company to agree for you to be a swappable asset. The laws are pretty crazy for us workers who just want to go out and make some cash money!
For me personally, I took a perm role after 10 years of contracting to ride out the market and see where life goes. The one benefit of taking on a perm position was to try out a role I had never tried before. Some roles I could never get as a contractor with no experience. Currently, I'm doing a 'head of' position and overseeing three departments. As a contractor of 10 years, it is highly unlikely that I would have got this role before. In a few years time, this will enable me to win the potentially higher-paying contract, if that's the path I feel like taking and it makes sense. As the market is in limbo, now is a great time to try new things.
The one thing to remember, you never see a homeless IT worker begging for spare change. No matter what you pick there are still lots of jobs for IT workers. There are still more jobs than they are people, so it will all work out. You may simply need to pay a little bit more tax 😢