Off Payroll in the Public and Private Sectors (IR35)

Are you working in a role ‘deemed as being inside IR35’?

Below you will find a brief explanation of the impact of the Off Payroll (IR35) legislation, and how it may affect the way you work. This is commonly referred to as IR35 – in fact, IR35 rules have not changed, just who makes the decision whether it applies to an assignment, and the way payments are made thereafter

The government announced changes from April 2017 for the Public Sector, and April 2021 (postponed from April 2020) which affect the operation of Personal Service Companies (PSCs / your own Ltd company). End clients will become responsible for deciding if rules (called ‘IR35’) apply.

For contracts that are deemed to fall inside IR35, the agency will have to collect PAYE tax and NI (Employee’s and Employer’s) at source.

This is a change for workers operating through a PSC who currently manage their own tax and NI payments. Those working through an Umbrella will not be affected as these deductions are already made at source.

So what does this mean for you if IR35 applies?

If you work as a PSC, this won't necessarily stop you doing so, but because now agencies will have to deduct tax and NI before making a payment to you, you need to think through your options carefully. The benefits to you of working through a PSC will vary based on your personal circumstances and need to be weighed up against the costs of running these arrangements.

So what are your options with GSA Techsource?

  • You can continue to operate via your PSC, however your payments will have Tax and NI deductions made when you work in the public sector when deemed inside IR35
  • You can transfer to a compliant umbrella company as they are unaffected by these changes.

Why do the pay rates differ for Umbrella and PSC?

One of the most confusing aspects of these changes is that each of these two options will have a different pay rate, which is due to the timing of the deduction of Employer’s National Insurance.

  • An umbrella pay rate will always be higher as the deduction of Employer’s NI is made by the umbrella from the pay rate to them. They will also then deduct PAYE and Employee’s NI.
  • When paying a PSC, GSA Techsource Ltd must submit Employer’s NI directly to HMRC before payment is made to the PSC (ie before the quoted pay rate). This Employer’s NI is essentially the difference between the Umbrella pay rate and the PSC/Ltd Company pay rate. PAYE and Employee’s NI are then deducted before payment is made to the PSC.

The table below illustrates the different order of deductions for the two models:

(NB. the figures are purely for the purpose of this example and are not indicative of actual NI or pay rates)

UMBRELLA

 

PSC (YOUR LTD COMPANY)

Quoted Umbrella Pay Rate £300

                                 

Employer’s NI submitted to HMRC £40

Less Employer’s NI deducted (£40) £260

 

Quoted PSC pay rate £260

Less PAYE and Employee’s NI

 

Less PAYE and Employee’s NI

Net take home pay

 

Net take home pay (plus VAT on full PSC pay rate if VAT applicable

It is worth noting that if IR35 had applied to your assignment before these changes, your net pay would be calculated in the same way as above. The only difference is that your PSC would have paid over the Employer’s NI from what would have appeared to be a higher pay rate, whereas the agency now does this as the ‘deemed employer’ before the pay rate is applied.

You will also find that this income does not apply for corporation tax, so all is not quite as negative as it seems.

To understand the impact on you for both models, we recommend speaking to your accountant or visiting www.listentotaxman.com as we cannot advise on the final take-home figures for either model, as this will depend on your personal circumstances. However, generally, the difference may only be marginal.

If you require more detailed information on this legislation, please view the government’s own guidance here:

​https://www.gov.uk/guidance/understanding-off-payroll-working-ir35

Contracting Through GSA / How to Write a CV / How to Succeed at Interview / Competency Based Interviews / Self Bill Invoicing / Public Sector Opportunities / Submit CV