7 ms·

It's messed up that the UK has such differential tax rates between employment and self employment that this matters at all.

Silhouette 4y ago
The irony is that it mostly doesn't any more. There are several different types of employment status and business relationship recognised in legal and tax rules but one way or another the person actually doing the work ends up paying a very similar rate of tax in all of them now. Since the government started taxing dividends at significant rates on top of the corporation tax already paid any small owner-run businesses that pay out via salary+dividend arrangements are close to the same total tax level as an employee pays in income tax and NI. You're actually quite a bit worse off financially now if you equate gross revenue for the business with salary for an employee because the business has to cover all its own costs in terms of paid time off, pension contributions and so on. And of course you have none of the job security and other protections that employees have under our system. The only ones who really win big under the current system seem to be the employers of disguised employees because they can dodge employer NI contributions if they pay via a Ltd company outside IR35. But they solved the problem of getting hit with employer NI under IR35 by forcing contractors to work through umbrella companies and then pay all of the costs for both employee and employer themselves. And since that has widely been done inappropriately through blanket policies and lazy status determinations since the rules that are now to be repealed were introduced the one really big tax anomaly in the whole system is the legitimate contractors (and other independents like freelancers) who have been hit with a far higher tax bill than anyone else.
- sparsely 4y ago
  The dodged NI contributions can be passed through via higher comp though - it ends up reducing the total cost of employment.
  - Silhouette 4y ago
    If you're going to look at the wider picture like that then you should also consider the extra costs though. A typical employee in this country might receive around 7 weeks of paid time off per year at their employer's expense, mostly holidays plus a few sick days on average. That alone would be a far greater benefit in terms of effective rate than receiving a rate increase equivalent to dodged employer NI that are being passed through instead. Then there are pension contributions, more exotic paid time off that most employed professionals could benefit from like parental leave or cover for jury service, and the expenses of running the Ltd including statutory obligations to file accounts and some other paperwork.
petesergeant 4y ago
It's not a difference in rate between employment and self-employment, though, and that's really the core of the issue. If you're self-employed your tax rates are (virtually) identical to those who are employed. If you set up a company and pay yourself a salary from that company, those tax rates are also virtually identical (although now you're having to pay employer NI contributions). What's different is the tax rate on dividends from shares, and the tax on employment, and that's the tax loophole that IR35 seeks to close.
- Silhouette 4y ago
  But when IR35 was introduced the dividends weren't really taxed at all. In fact there were even some tax credits related to dividends for a while. Today the situation is completely different and the tax rates on dividends are not far off NI levels at lower income levels and much worse higher up (because employee NI drops to a very low rate once you're a higher rate tax payer but dividend taxes are uncapped). Once you factor in things like the contractor's Ltd paying for its own running costs, time off for things like holidays or sickness, and pension contributions it makes very little sense for someone to go the Ltd route instead of being an employee just for tax/financial reasons now. The real advantages are in flexibility and having a real business-to-business relationship with clients, which can break various glass ceilings you might otherwise hit as an employee.
- adam-a 4y ago
  As an employee earning £50k a year I would pay £12224 tax and NI, as a self employed person I would pay £11303 tax and NI. If I'm working for my own ltd I will pay £10871 as a combination of personal tax and corporation tax. The difference is not enormous. I think the IR35 stuff was to stop employers avoiding their NI contributions which is an extra £6155 tax on the £50k salary.
  - Silhouette 4y ago
    When IR35 was first introduced dividends weren't taxed the same way and it really was a big tax advantage to work through a Ltd. That was arguably a reasonable situation if you really were running your own business with your own costs and risks as well. However it was definitely exploitable by people whose clients were really employers offering them the same perks as permanent employees anyway. But that hasn't been the situation for quite a few years now so the financial arguments to "justify" IR35 don't really make much sense any more.
TazeTSchnitzel 4y ago
I was surprised when I moved to Sweden that it didn't seem to have an IR35 equivalent, but then I noticed that taxation is exactly the same for employment and self-employment.
- buzer 4y ago
  That sounds surprising as someone from Finland. https://knowledge.leglobal.org/eic/country/sweden/legal-framework-differentiating-employees-independent-contractors-19/ https://knowledge.leglobal.org/eic/country/sweden/legal-fram... & https://www.remotepass.com/blog/all-you-need-to-know-about-working-as-an-independent-contractor-in-sweden https://www.remotepass.com/blog/all-you-need-to-know-about-w... are these incorrect?
  - TazeTSchnitzel 4y ago
    Oh sorry, it does affect who must pay tax and how, but I think you pay more or less the same amount of tax either way.

Silhouette 4y ago

The irony is that it mostly doesn't any more. There are several different types of employment status and business relationship recognised in legal and tax rules but one way or another the person actually doing the work ends up paying a very similar rate of tax in all of them now. Since the government started taxing dividends at significant rates on top of the corporation tax already paid any small owner-run businesses that pay out via salary+dividend arrangements are close to the same total tax level as an employee pays in income tax and NI. You're actually quite a bit worse off financially now if you equate gross revenue for the business with salary for an employee because the business has to cover all its own costs in terms of paid time off, pension contributions and so on. And of course you have none of the job security and other protections that employees have under our system. The only ones who really win big under the current system seem to be the employers of disguised employees because they can dodge employer NI contributions if they pay via a Ltd company outside IR35. But they solved the problem of getting hit with employer NI under IR35 by forcing contractors to work through umbrella companies and then pay all of the costs for both employee and employer themselves. And since that has widely been done inappropriately through blanket policies and lazy status determinations since the rules that are now to be repealed were introduced the one really big tax anomaly in the whole system is the legitimate contractors (and other independents like freelancers) who have been hit with a far higher tax bill than anyone else.

sparsely 4y ago
The dodged NI contributions can be passed through via higher comp though - it ends up reducing the total cost of employment.
- Silhouette 4y ago
  If you're going to look at the wider picture like that then you should also consider the extra costs though. A typical employee in this country might receive around 7 weeks of paid time off per year at their employer's expense, mostly holidays plus a few sick days on average. That alone would be a far greater benefit in terms of effective rate than receiving a rate increase equivalent to dodged employer NI that are being passed through instead. Then there are pension contributions, more exotic paid time off that most employed professionals could benefit from like parental leave or cover for jury service, and the expenses of running the Ltd including statutory obligations to file accounts and some other paperwork.

petesergeant 4y ago

It's not a difference in rate between employment and self-employment, though, and that's really the core of the issue. If you're self-employed your tax rates are (virtually) identical to those who are employed. If you set up a company and pay yourself a salary from that company, those tax rates are also virtually identical (although now you're having to pay employer NI contributions). What's different is the tax rate on dividends from shares, and the tax on employment, and that's the tax loophole that IR35 seeks to close.

Silhouette 4y ago
But when IR35 was introduced the dividends weren't really taxed at all. In fact there were even some tax credits related to dividends for a while. Today the situation is completely different and the tax rates on dividends are not far off NI levels at lower income levels and much worse higher up (because employee NI drops to a very low rate once you're a higher rate tax payer but dividend taxes are uncapped). Once you factor in things like the contractor's Ltd paying for its own running costs, time off for things like holidays or sickness, and pension contributions it makes very little sense for someone to go the Ltd route instead of being an employee just for tax/financial reasons now. The real advantages are in flexibility and having a real business-to-business relationship with clients, which can break various glass ceilings you might otherwise hit as an employee.
adam-a 4y ago
As an employee earning £50k a year I would pay £12224 tax and NI, as a self employed person I would pay £11303 tax and NI. If I'm working for my own ltd I will pay £10871 as a combination of personal tax and corporation tax. The difference is not enormous. I think the IR35 stuff was to stop employers avoiding their NI contributions which is an extra £6155 tax on the £50k salary.
- Silhouette 4y ago
  When IR35 was first introduced dividends weren't taxed the same way and it really was a big tax advantage to work through a Ltd. That was arguably a reasonable situation if you really were running your own business with your own costs and risks as well. However it was definitely exploitable by people whose clients were really employers offering them the same perks as permanent employees anyway. But that hasn't been the situation for quite a few years now so the financial arguments to "justify" IR35 don't really make much sense any more.

TazeTSchnitzel 4y ago

I was surprised when I moved to Sweden that it didn't seem to have an IR35 equivalent, but then I noticed that taxation is exactly the same for employment and self-employment.

buzer 4y ago
That sounds surprising as someone from Finland. https://knowledge.leglobal.org/eic/country/sweden/legal-framework-differentiating-employees-independent-contractors-19/ https://knowledge.leglobal.org/eic/country/sweden/legal-fram... & https://www.remotepass.com/blog/all-you-need-to-know-about-working-as-an-independent-contractor-in-sweden https://www.remotepass.com/blog/all-you-need-to-know-about-w... are these incorrect?
- TazeTSchnitzel 4y ago
  Oh sorry, it does affect who must pay tax and how, but I think you pay more or less the same amount of tax either way.