inside IR35 - make it simple for me!

johnweir123

Thinking about applying for a contract role.  I've only done permanent roles before so don't know how they pay when you're a contractor. 

I've googled inside IR35 and they talk about some of your salary being 'expenses'.  

Is this something to do with covering your traveling costs and tax offsetting?  Do you actually get to spend 'expenses' money but it is your allowance to cover your expenses or does it go somewhere else? 

Very simple question for someone who is used to contracting but quite mysterious if you've not. 

I know this forum is the place to come to get a simple answer!

Grumpy_chap

johnweir123 said:

Thinking about applying for a contract role.  I've only done permanent roles before so don't know how they pay when you're a contractor. 

I've googled inside IR35 and they talk about some of your salary being 'expenses'.  

Is this something to do with covering your traveling costs and tax offsetting?  Do you actually get to spend 'expenses' money but it is your allowance to cover your expenses or does it go somewhere else? 

Very simple question for someone who is used to contracting but quite mysterious if you've not. 

I know this forum is the place to come to get a simple answer!

Whatever you googled is likely incorrect.  There are very few expenses that can be set against gross income with IR35 contracts now.

Do you know which Agency you will be with and which UCs they work with?  It is very easy to get a simple example calculation from any UC.  If you do not know, then pick one of the larger UCs and ask for an example calculation.

In relatively simple terms it will look like this:

Day rate x 5 = weekly gross to UC
Deduct UC margin, typically circa £25 per week.  No taxes applied to this business operating cost.
Make employer pension contributions.  This will be all your pension contributions as you don't want the less tax-efficient employee pension contributions.  Pension contributions (using salary sacrifice) is generally about the only deductible that helps to reduce the tax liabilities.

Weekly gross - margin - pension = "total cost to employ".
This "total cost to employ" includes employer's NI plus apprenticeship levy.
"total cost to employ" - employer's NI - apprenticeship levy = employee's gross income
employee's gross income is then paid as salary and subject to employee's NI and income tax in the normal manner.

The actual calculation is iterative as the employer's NI plus apprenticeship levy is a function of employee's gross income, but employee's gross income is not available until employer's NI plus apprenticeship levy have been deducted.

I hope that helps.
If you have approximate figures, it will be possible to give more clarity, but any UC might be able to do so with more pace and accuracy than I can on a note pad.

johnweir123

Okay, here's an example.  I was wondering about the bit marked as 'expenses' - is that your money or not? 

DullGreyGuy

johnweir123 said:

Thinking about applying for a contract role.  I've only done permanent roles before so don't know how they pay when you're a contractor. 

I've googled inside IR35 and they talk about some of your salary being 'expenses'.  

Is this something to do with covering your traveling costs and tax offsetting?  Do you actually get to spend 'expenses' money but it is your allowance to cover your expenses or does it go somewhere else? 

Very simple question for someone who is used to contracting but quite mysterious if you've not. 

I know this forum is the place to come to get a simple answer!

The key thing to remember is the day rate isnt your day rate, its the umbrellas day rate and its from that that things like the Employers NI or Employers Pension Contributions are made from. The UC will also have their own monthly/weekly fee. 

Holidays you will have a choice on, you either sacrifice some of your daily pay but then get paid holidays or you waive your paid holidays and get all the money on days worked (though it will show as another line on your payslip)

Other than actual expenses to be build to the client, overseas travel etc, have never had any material expenses when under an umbrella. The rules around temporary working, lunches, commute etc were all tightened up a good while ago. 

johnweir123 said:

Okay, here's an example.  I was wondering about the bit marked as 'expenses' - is that your money or not? 

Can't tell from that screenshot but would assume that certainly not all of it is, certainly some do assume a fixed daily expenses which you pay out of your gross but then arent taxed on.

What's the day rate?

johnweir123

I think I put in £300 a day to generate that example. 

DullGreyGuy

johnweir123 said:

I think I put in £300 a day to generate that example. 

https://www.giantgroup.com/umbrella#calculator

The above gives you much more of breakdown, note that it assumes that there is no pension at all and you dont get paid holidays.

In practice the only difference between umbrellas is their fee (company margin as they call it in Giant) and when you get paid (its a "paid is paid" situation so if the agency is slow paying the umbrella then the umbrella will be slow paying you)- the UC will define your payment date by when they receive the funds so some are within 24 hours, some are next working day, some are next Friday etc. 

Grumpy_chap

johnweir123 said:

Okay, here's an example.  I was wondering about the bit marked as 'expenses' - is that your money or not? 

I don't know what that example covers under "expenses".

Is that calculator on the basis of own Ltd Co. but within IR35?
That method of working is not really viable now but was previously when IR35 was newer.

You need to look for an example using a UC calculator. 
There is not a great deal to differentiate between UCs so the link DGG provided is as good as any.
The elements that can allow you to differentiate between UCs really come down to:

• the UC margin (fee)
• speed of payment
• how they allow pension contributions to be made
• any "extras" offered - for example employee discount scheme such as Reward Gateway

You will probably find that the Agency provides a shortlist of UCs that they work with and you need to select from that list.



EDIT:
I found the calculator the OP used:
https://www.contractorcalculator.co.uk/insideir35contractorcalculator.aspx

The "expenses" are quoted as

•  legitimate Section 98 expenses
• allowable expenses 5%

I do not know what the "legitimate Section 98 expenses" refers to.
The "allowable expenses 5%" refers to the deemed payment calculation for a contractor paid inside IR35 via their own Ltd Co.  This "allowable expenses 5%" is now longer permitted under the deemed payment calculation. 

SiliconChip

The figures in the calculater the OP used make no sense anyway:

Gross revenue £77,000, minus expenses of £3,850 giving profit of £61,698 - a ten year old could tell you that sum is complete nonsense, and they could probably have written better software!

Marcon

Have a look at https://www.litrg.org.uk/ (don't be put off by the name of the site - it's a mine of useful info for everyone, not just low income) eg https://www.litrg.org.uk/working/umbrella-company-workers