Leaving contracting due to IR35? The benefits to expect from a new employed role

Many contractors working via intermediaries such as partnerships or limited companies will be affected by changes to the IR35 tax legislation due at the start of the 2021/22 tax year.

What is IR35?

The government first introduced the IR35 rules in April 2000 to tackle so-called ‘disguised employment’. This refers to a situation where an individual would, if not for the imposition of a limited company/partnership, have an employer/employee relationship rather than that of a contractor.

Contractors working via an intermediary typically pay themselves a modest salary, generally at or just below the income tax threshold, and top the remainder of their income up with dividends. This results in less income tax and National Insurance revenue for HMRC compared to what the taxman would receive were the individual an employee paid only in salary rather than a contractor paid largely in dividends.

To address this issue, the government is tightening the IR35 rules and looking closer at contractors working this way.

How will IR35 affect me?

HMRC will use a number of tests to see whether you’re in what it deems to be disguised employment, including checking whether you:

• Can work under your own control without management by your client
• Face financial risk — employees rarely risk financial loss from being employed, whereas contractors do, for example if you buy certain assets or equipment or a client fails to pay you
• Have a fixed notice period, which in HMRC’s eyes makes you more like an employee rather than a contractor, who can face immediate termination
• Get employee benefits as part of your role, including holiday pay, sick pay, pension, training courses or other perks designed for employees only.

The result of the upcoming tightening of rules has seen many contractors and limited company directors deciding to shut down their operations and return to an employed role.

What does a good benefits package look like for a new employee in 2021?

Many contractors now seeking a new employed role as a result of IR35 have been contracting for years. The world of employment has therefore likely changed significantly since they were last a direct employee and, since the outbreak of the pandemic, things have changed even faster still.

This can make it difficult to know what to expect and what to ask for when it comes to contract negotiations around perks and benefits.

According to The Employee Benefits & Workplace Satisfaction Survey 2021, a new survey of 2,000 SME workers from insurance adviser Drewberry, 47.4% of companies brought in new benefits in 2020. Of the employers which did introduce benefits, the most common ones brought in were:

• Work from home flexibility (39.7%)
• Flexible working hours (29.4%)
• Death in Service Insurance (19%)
• Group Private Health Insurance (16.9%)
• Health and wellbeing apps (16.5%).

This offers important insight into what employers offer employees in today’s labour market. It provides contractors seeking employed roles due to the altered IR35 rules with a good indication of what they should expect from future employers so they can enter contract negotiations surrounding perks and benefits armed with all the facts.

More on IR35.