From 6 April 2017, if you provide your services to a public authority contractor, new rules apply. The contractor, agency or other third party who pays you will deduct Tax and National Insurance contributions (NICs) from your fees.
The contractor calculates the Tax and NICs and pays these amounts over to HM Revenue and Customs (HMRC) on your behalf. Those payments are reflected on your tax records and contribute to your state benefit entitlement. The contractor will also pay employers NICs on the fees.
What do the changes mean?
If you continue your arrangement via a Limited Company then your current engagement with your contractor will be changing, which will mean you will have less income to extract from your company.
As an example (assuming your company is not VAT registered):
- Your company invoices the contractor for £6,000 for services provided.
- The contractor deducts £1,871 (£1,458 tax and £413 NICs) which it pays over to HMRC.
- Your company receives £4,129 for your services instead of the £6,000 received at present.
- If you pay the £4,129 out of the company to yourself, then no further tax and NIC is due.
If your company is VAT registered, you will still charge VAT on the £6,000 and receive this from your contractor so you can pay this to HMRC – i.e. nothing changes from a VAT point of view.
Your contractor may have already been in touch with you regarding the above and may not be willing to continue the engagement via your current structure.
So what are the options?
- Your contractor may be willing to continue to pay you through your Limited Company. If so, the example set out above illustrates the situation that will arise. You will therefore be worse off than you are at present.
- Your contractor may be willing to take you on as an employee directly. If so you would no longer be able to provide your services through your Limited Company.
We are aware that some contractor do not want to do this due to employment law and responsibilities as employer
- As an alternative you could provide your services via an Umbrella Company.
Due to the structure of an Umbrella Company, the payment made by the contractor to the Umbrella Company would be the same as the payment currently made to your Limited Company. However, the Umbrella Company will make certain deductions from the amount paid to you, which will result in you being worse off that at present.
Please do not hesitate to contact our tax team as soon as possible to discuss your next steps and decide on the way forward for you.