CONTRACTORS are set to be hit by a triple whammy of pay cuts as their employers introduce new ways of working to ensure they meet impending HMRC guidelines.
That’s the verdict of a leading accountancy firm which says the much-maligned IR35 legislation, which will be enforced from next April, will have a far-reaching impact on tens of thousands of workers.
Having enjoyed tax-efficient lives by paying themselves through limited companies, many contractors now face being placed on the payroll of the business they have been working for.
That will mean they lose thousands of pounds as they are placed into 20 or 40 per cent tax brackets, while they will have to pay National Insurance contributions, potentially for the first time in many years.
Paul Hornby, managing director of Cumbria-based JF Hornby and Co, said: “There are lots of people who very soon are likely to find themselves in serious financial trouble if they have been living lifestyles in line with earnings which soon may take a serious hit.
“There are so many people in this area who are working 40 hour weeks at the likes of Sellafield or BAE as contractors and they are right in the firing line with IR35.
“Now is the time for them to be checking their paperwork, speaking to the companies which procure their services and understanding if and how they may be affected.”
The IR35 legislation is designed to prevent individuals from setting up a business and paying lower rates of tax through it, when they are effectively in full-time employment with a company.
People who are employed as contractors, but only work for one business, are firmly in the sights of HMRC.
This is because the taxman believes they are effectively carrying out the work of a permanent staff member, but getting around paying higher rates of tax and National Insurance by operating as a contractor through a limited company.
Individuals who do this are able to pay themselves a salary up to the tax-free threshold of £12,500 without financial penalty. They can also pay themselves £2k in tax-free dividends, with everything else up to £35,500 taxed at a rate of just 7.5 per cent.
The main tax efficiency comes through the ability of the individual to split some of their income with a spouse or partner, which means in many cases, a minimal amount of tax is paid.
Under the IR35 rules, a majority of those people will be moved into a position where they are on the payroll as an employee of the business they had previously served as a contractor.
That means they will be taxed at the appropriate PAYE rate and will have to pay National Insurance contributions - as will their employer.
“This is a triple whammy for these people,” said Paul. “They have been accounting for their finances and tax in a perfectly legal and legitimate way, but they are being targeted.
“Because the employers will have to start paying National Insurance contributions for these people too, the likelihood is that any salary they are offered will take this into account; there’s no way these big employers are going to soak up the cost.
“So if you look at a couple who between them have been earning a strong joint income and have the home, cars and lifestyle to go with that, they are in for a massive shock.”
There have been a number of high profile IR35 cases to date, with the legislation for the public sector already in place.
NHS Digital has been hit with a £4.3m bill for falling foul of the rules, while former BBC presenter Christa Ackroyd faces a bill of more than £400k.
There is mounting pressure on MPs to sign up to a motion which calls for the impending laws to be scrapped, with a number of organisations which represent contractors joining together in a tour de force.
Paul said: “Right now, this is coming. The government is showing no signs of slowing down. A lot of people are in for one hell of a roller coaster ride. This will devastate lives, families and marriages, make no mistake.
“This is not something which can be put to the side until the last minute. It’s imperative anyone who might be affected acts now.”