A contractors guide to finances, post IR35

Hello. I’m Ciaran Reynolds. Financial Adviser at LUNA.

IR35, another name for the off-payroll tax legislations were introduced into the private sector on 6 April 2021. Although the intention was to stop what could be described as underhand tax avoidance schemes and ensure that two people broadly doing the same work would pay broadly the same tax. The implementation has had an immense impact on the flexible, freelance workforce in the UK.

Many took the decision to leave the contracting industry, I chose to use my experience and qualifications obtained through my 8 years of contracting to join Luna Financial Planning. My goal is to make financial advice accessible to all, helping my clients create a plan to achieve more financial freedom.

Whilst a small number of firms have adopted HMRC’s guide to individually assessing each individual worker, many consultancies and larger firms have adopted a blanket ban on limited company contractors, forcing them into (sometimes very questionable) umbrella payroll situations. In reality, it has created an industry that previously genuine self-employed freelancers are being treated as an employee for tax purposes, but not for employment rights.

Working through an umbrella payroll solution, You will find yourself paying tax and national insurance contributions at a disproportionate rate to that of your permeant or fixed term colleagues. This is due to the fact that out of your ‘day rate’ you also now have to pay employer national insurance contributions and the apprentice levy, as well as PAYE tax at your marginal rate and your national insurance contributions.

However, you are now classed as an employee of that umbrella company, so you are afforded some employment benefits.

You are now entitled to statutory sick pay at a rate of £96.35 a week for up to 28 weeks. Firstly, this only represents a fraction of your daily rate, but in reality, due to the short term ‘flexible’ nature of the projects your work on, the likelihood is your contract will be terminated if you are likely to be ill for more than a few weeks. If you fall within in this category, you may wish to consider setting up an income protection policy, which would pay you a tax-free income should you not be able to work due to accident or illness.

Due to your newly found employment status, you also must be auto enrolled into your (umbrella) employer’s pension scheme. Many of the companies that I have researched will only make contributions to their own pension scheme. There a very few that will allow you to pay into a personal pension, but many of those will require you to take advice to do so. Some will also offer a salary sacrifice arrangement which is a great way to reduce your income tax liability.

As many of the consultancies and agencies have their own list of ‘preferred’ umbrella companies (this is a topic for another article), there is a risk that you will be enrolled into each of their pension schemes, leaving you with numerous pension pots, leaving you paying number of different charges and possibly having a number of different ‘default’ investments that may not match your risk profile. You may wish to consider having one low-cost pension plan that has been set up to match your future goals and risk profile, to which you can consolidate your various pension pots and be comfortable that you have a tailored investment solution.

Many companies also offer flexible employee benefits to staff. These normally include valuable benefits such as a death in service benefit and private medical insurance. A death in service benefit is a life assurance policy that will generally pay in the region of 4x your annual income, giving you peace of mind that should the worst happen, your family will receive a lump sum that they could use to pay off debts, or replace your lost income. Unfortunately, as you are an employee for tax purposes only, you will unlikely receive this valuable benefit from your umbrella company. A low-cost level term life assurance policy could provide you with the peace of mind that your families future would be secured should the worst happen.

Although the contract market can still offer a flexible lifestyle and be more lucrative than an employed role, the above are just some considerations if you find yourself within IR35 or working through an umbrella company. If you would like to discuss your options, or review your finances and create a bespoke solution, please get in touch with us for a free initial consultation.

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