AROUND 170,000 self-employed workers could be forced to pay more tax from April as the government implements new employment laws.
The so called IR35 change will hit those working in the private sector who pay less tax by setting themselves up as private companies.
The rules mean the business you work for rather than yourself will be responsible for deciding your tax status.
Those deemed to be inside the rules are taxed as an employee, but don’t receive employment rights like holiday or sick pay.
The IR35 change was first introduced in the public sector in 2017.
During the Budget in 2018, former Chancellor Philip Hammond then announced plans to implement it for the private sector too.
This was meant to happen April 2020, but the change was delayed until April 6, 2021, due to the coronavirus crisis.
The government estimates next month’s change will affect 170,000 contractors, but it will only apply to medium and large-sized businesses.
It says genuine freelancers and self-employed workers won’t be affected.
What is IR35?
IR35 are off-payroll working rules, which for the past 20 years have prevented people avoiding paying their dues.
The rules make sure that self-employed workers pay roughly the same tax and National Insurance contributions as employees.
Reforms to it were introduced by Chancellor Philip Hammond and are meant to tackle so-called disguised employment.
This is a term for those who provide freelance services through personal service companies to reduce their tax bills, but who the tax authorities believe should be treated as employees and thus be taxed at source through the payroll.
Who does it affect?
The changes will hit those working in the private sector, such as IT workers and management consultants, who pay less tax by setting themselves up as private companies.
This is usually set up as a limited company, but it could also be a partnership, a personal service company as well as an individual.
You may be affected by these rules if you are:
- A worker who provides their services through their intermediary
- A client who receives services from a worker through their intermediary
- An agency providing workers’ services through their intermediary
From April 6, your client should provide you with a “status determination statement” if the rules apply and explain their decision.
If the rules apply, it must deduct tax and National Insurance contributions from your fees and pay it to HMRC.
Previously, contractors have determined their employment status for tax purposes themselves.
How will I be affected?
Calculations by advice website Contractor Calculator show a contractor earning £55,000 with expenses of £3,000 a year would be £7,489 worse off.
This is if the company passes on the entire tax burden onto a contractor, as businesses will be hit with extra taxes by treating freelancers as employees.
If the business instead decides to foot the bill, you’d still be £3,119 worse off unless you raised your rates.
Of course, the exact amount you’ll lose each month depends on how much you earn but some can expect a yearly pay cut of roughly 20%.
The average annual salary for freelancers is just above £58,000, according to CW Jobs.
Self-employed workers are taking pay cuts, working in jobs they don’t want and delaying having kids in order to get on the housing ladder.
Freelancers could also slash tax bills by £355 each by claiming for expenses.
We explain all you need to know about the fourth self-employed government grant and when to claim.
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