Wednesday, January 24, 2007

I am my own employee!

For a long time now the tax laws have meant that contractors are deemed to be earning a salary, rather than a fee if they only have one client at a time. This was to stop the practice of contractors evading income tax by providing their services through limited companies, paying themselves small incomes and taking the rest in dividend payments from the company. Debatable but let's go with the flow for the sake of it...

So.... Contractors now use umbrella companies, who's only task is to receive the money paid by the client, run a payroll calculation and pass on the net pay to the contractor. Since I am anxious to pay all my dues and sleep soundly at night, this is what I do and I pay about £60 a month for this company to run the payroll.

And here comes the clever bit....

Because I am technically employed by this company, and they have to pay an employer's NI contribution in respect of my salary, I pay both employee's and employer's National Insurance payments on my gross income!!!

That's £287.92 National Insurance because I earned some money and an extra £643.35 because the chancellor reckons that I employ myself. Nearly a grand a month of Treasury revenue that isn't even called tax.

What the fuck is all that about?


towcestarian said...

Your analysis is not accurate. The IR35 trap has nothing to do with how many clients you have, it is a test to see if you are effectively an empoloyee of that one client. I rarely have more than one client at a time but have never been on the wrong side of IR35. How? Well I almost always work on a fixed price basis for a pre-specified piece of work - the clent has no automatic right to change the work I am doing. I also work from home as much as possible, using my own (my company's) equipment and consumables - if I work on site I always try to use my own laptop, paper, pens etc. I do hot have the same working time or holidays as the client, and receive no "perks" from them.

If your client won't work this way, then quite frankly you really are just an employee, and the IR is right to get the equivalent amount of cash that they would have received if you were one. If you object to paying employer's NI, charge more for your time, after all the client/employer is saving that money from his own tax bill.

Umbongo said...

The problem here (and IR35 was created to "solve" this problem) is the ability of personal service companies to avoid national insurance contributions. If NI and income tax were melded into one tax there would be no point in paying yourself by dividend rather than salary since both streams of income would bear the same rates of tax. Quite why Gordo allows this nonsense to continue is a mystery. Well, not quite: if you follow the money you'll see that a lot of civil servants administer the collection side of NI: they would lose their function (but not, of course, their jobs - this is the civil service after all) if the system was rationalised.