IR35- What does it mean for your UK contracting career?
What is IR35 and how it it relevant to my UK contracting career?
If you’ve been reading the news of late, you may have heard a lot of talk about changes to IR35 and how it’s going to impact IT contracting in the UK.
What are the changes? What does it mean? And should you be worried?
Well to understand IR35 properly you really need to understand the history. IR35 tax legislation was written back in 1999 and implemented in the Finance Act in April 2000. The term ‘IR35’ came from the press release reference – ‘Inland Revenue 35’.
The legislation was introduced to address loopholes in the law which allowed people to pay less tax and National Insurance. Prior to this, professional employees were able to convert their tax status to a Limited Company. They would then continue working for the same firm as ‘disguised employees’ saving themselves a heap of money.
The legislation worked to a point, but the tests to determine whether someone was a ‘disguised employee’ vs a bona-fide contractor (i.e. working as a true freelancer) were not very well written. As a result those ‘disguised employees’ smart enough to work the system carried on paying less tax.
In 2017 the legislation was updated again by the Office of Tax Simplification. From April of that year, any employee of a public company (any government organisation) deemed ‘off-payroll’ (which essentially means providing contractor services) automatically fell under IR35. This means public sector contractors were no longer able to have their own Limited Company. They had to pay normal PAYE income tax through an intermediary known as an Umbrella Company.
So if you were working as a UK IT Contractor for say the NHS or a local council, all of a sudden you were paying more tax. This caused a shift towards contractors favouring the private sector. As a result, public companies were forced to look for permanent employees or increase contractor rates to retain top staff.
What are the upcoming changes to IR35?
Now the UK Government has recently decided to broaden the reach of IR35. From April 2020 the legislation will also apply to those working off-payroll in private companies (i.e. everyone else). This has caused uproar in certain areas. Some say it benefits large consultancy companies (who have been lobbying the government on this for some time), over the independent contractor who is often competing for the same business. From April 2020 onwards, all UK contractors will have to pay the same tax as regular employees, without the job stability or regular company benefits such as paid leave, a company pension plan or company medical insurance.
Is this the end of UK IT contracting as we know it?
What won’t change in April 2020 is business demand for contractors. With a possible reduced supply of contractors on the market, private companies will have to increase their rates if they are going to appeal to seasoned contracting professionals.
Expect contracting to evolve from what it is today. If the demand for talented contractors continuously outstrips supply, I wouldn’t be surprised to see companies enticing contractors with additional benefits to attract the right people.
So should you be worried? There are always good jobs available for talented people. A UK IT contractor can earn in 6 months what their permanent equivalent gets in 12 months. And a reasonable pay rise post April 2020 should go some way towards off-setting the tax increase to maintain this earnings differential. Contracting will always be the best option for Kiwis and Aussies wanting to maximise their career and travel options while in the UK and I can’t see that changing anytime soon!
We offer both Limited Company and Umbrella Services to all of our candidates. We can also provide future-proof employment opportunities for those wanting to contract but without foregoing employee benefits such as pension and paid leave. Contact us to find out more.