IR35: Contractors 'face 13% income drop from April'

Contractors’ incomes will typically fall by 13 per cent if the taxman’s IR35 proposals for the public sector go ahead, it emerged at the weekend.

Deloitte told the Financial Times that the figure was the average reduction in take-home pay that Personal Service Companies could expect assuming the proposals take effect from April 2017.

The calculation takes into account that the party who pays the PSC will have to deduct income tax and National Insurance before transferring the net funds to the company.

The accountant reportedly gave the example of a contractor earning £105,000 a year -- or £500 a day for 42 weeks – who, by using a PSC, takes home £70, 988 a year.

But this contractor, who is currently paying corporation tax and income tax on dividends, would take home only £61,553 a year if they were taxed as an employee.

Other experts point out that by taxing contractors as employees without giving them the rights of employees, the Treasury hopes to claw back the £400m a year it says it is losing.

HM Revenue & Customs has since managed expectations however, saying that its proposed system will only “cover a majority” – not all public PSCs, and that such coverage is “the best we can hope for.”

This admission by the Revenue’s senior policy adviser Julie de Brito may make for an awkward talking point at the next IR35 Forum meeting, scheduled for Tuesday September 20th.