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IR35 Reforms- An eye-opening cost comparison for recruitment agencies

With the consultation on reforms to off-payroll rules in the private sector now closed, implementation of the reform is closer than ever. The general consensus is that recruitment agencies are aware of the changes but not everyone has put plans in place for making tax and NI deductions for PSCs who fall inside IR35.

It’s important that they find a solution soon, or many recruitment agencies will find themselves liable for the unpaid tax on gross payments made to PSCs. 

But making deductions to a contractors pay isn’t going to go down well as it will mean a significant reduction in take home pay.  To put it into figures, a PSC contractor on £15.00 per hour who works 40 hours per week will currently take home £600.00. Under the new rules the same contractor will take home closer to £500.00. And that’s if you have the facility in-house to run a PAYE payroll. If you don’t these contractors will need to engage an umbrella company who will deduct their margin from the contractors pay.

With such a significant reduction in take home pay, you’ll need to close the gap as far as possible to keep your contractors happy.

Here’s how Galaxy Pay suggests you do it:

  1. Negotiate the contract rate.  Your first task is to speak to your client and negotiate an increased contract rate for the assignment.  The industry is expecting contract rates to increase across the board in response to contractor demands for compensation, so your client may already be expecting your call. Before making the call it would be useful to calculate the percentage increase required to make up the difference.
  2. Research umbrella companies. Your average umbrella company charges £25.00 per week which will be deducted from the contractor’s wages. By doing your research and referring your workers to a Professional Passport approved umbrella such as Galaxy Pay, who charge only £15.00 per week, contractors will be saving on average £10.00 per week whilst still being compliant.
  3. Offer other benefits. Few umbrella’s offer true value for money in their margin. Within the Galaxy Pay margin contractors get a whole host of additional benefits. For example, Galaxy Pay workers get access to Flexr Rewards and the average Flexr Rewards user saves £1,085 every year. In the example above this would be equivalent to a refund of the tax paid over 6 months.

You’ve got until April 2020 to close the gap, but remember you’ll likely be signing contracts which run over this date so you actually need to be taking action now. For more information about Galaxy Pay get in touch by heading to the “Contact Us” page of our website or giving us a call on 03333110911.