Tax reforms punish self-employed

Firms are changing how they employ freelancers and the results are devastating. Harry Brennan investigates

Pay thousands more in tax, take a massive pay cut or risk being out of work altogether – this is the stark choice millions of self-employed contractors working in the private sector face as firms prepare for new tax rules.

In hushed telephone conversations and via covert emails, contractors working for Britain’s biggest banks have revealed the dramatic impact the rule changes are already having on their lives, as the fallout leaves them struggling to provide for their families.

Some were ordered not to talk, but spoke to this newspaper on condition of anonymity.

As of April, employers will be responsible for assessing whether freelancers are truly self-employed or should be treated as full-time employees. Previously, contractors declared this themselves, but the rules are changing following a government crackdown on temporary workers gaming the system under the “IR35” regime.

These rules allow genuine contractors to pay less tax, compensating them for the holiday, sick pay and access to workplace pensions that freelancers miss out on.

But assessing who should be paying what is not always straightforward and has landed some employers such as the BBC in high-profile court battles with the tax authority.

Banks in particular, which employ more than 70,000 contractors, are taking a cautious approach to the April reforms, with Barclays, HSBC, Lloyds and RBS all saying they will not be taking on any more new work with contractors unless they are paid and taxed in the same way as employees via umbrella companies.

The umbrella firm becomes the effective employer, allowing banks to outsource their accounting responsibilities. This means freelancers pay more tax and cannot

Health professionals

Millions of Britons are self- employed, with artists and the media most likely to choose the freelance life claim back tax on expenses.

One freelancer, who has been working at RBS since June, said he would struggle following the 25pc cut in his annual income that would result from working via an umbrella firm.

“In short, I’m scared,” he said. “The cost of supporting a family in London is huge. We remortgaged in February and I don’t know if I will be able to keep the payments going. It’s keeping me up at night.”

Another, a 42-year-old business analyst working for Lloyds, said he had no choice but to enter an umbrella arrangement. This will add to his tax bill and cause his annual salary of around £150,000 to fall by as much as a third, he said.

He has been a contractor through his own personal services company for 20 years, but will no longer benefit from paying his own income via salary and dividends or from clawing back tax on expenses such as equipment, training and insurance.

“The impact on my family will be huge,” he said. “I currently pay my mother-in-law’s mortgage so will have to sell her house. I will also have to pull my children, 10 and seven, out of private education.

“Freelancers rely on higher incomes to build up a war chest for those, sometimes long, periods of time we are not working. After these changes I’ll be lucky if I make it for two months out of work before going bankrupt.”

A number of banks have said they will consider bringing some freelancers on full time. However, the contractors who spoke to this newspaper said finding a position that paid well was nigh-on impossible. Competition from younger, cheaper workers is fierce and most of the bestpaid jobs are senior leadership roles – unsuitable for contractors who are used to working independently with little experience of management.

In some cases, freelancers have been unable to find any work at all. Stuart Parker, 42, has worked as a freelance business analyst in a number of large banks for years, but has been out of a job for more than 12 months.

“The contract market is completely dead,” he said. “With these new rules coming in, the banks aren’t hiring anyone. I’ve had to close down my limited company – I can’t afford to keep it running.”

He is considering working via an umbrella company, which would leave him around £40,000 a year worse off.

Seb Maley of Qdos, an employment tax firm, said the banks’ reaction to the reforms was “knee-jerk” and urged them to take a more pragmatic stance.

Andrew Chamberlain of The Association of Independent Professionals and the Self-Employed said the legislation was punishing freelancers.

“It has pushed banks to take this position and is having a damaging knock-on effect on the contractors they employ.

“It’s bad for the banks too, which rely on contractors’ expertise to get jobs done efficiently.”

Tens of thousands of pensioners have reclaimed more than half a billion pounds in tax they should not have paid when drawing from their retirement pots.

The taxman repaid a record £55m in the three months to the end of September, returning an average of £3,000 in rebates to savers who were overcharged, the latest figures show.

Since 2015, pension freedoms have allowed retirees more flexible access to their life savings. Up to 25pc can be drawn immediately in a tax-free lump sum at 55. Anything above this is subject to income tax at normal rates.

However a bizarre quirk in the system assumes one-off lump sums will continue to be taken as regular monthly withdrawals of the same amount. HM Revenue & Customs may assume someone taking £10,000 as a one-off to pay for a holiday, for instance, will withdraw the same amount each month as income – taking £120,000 over a year.

Tax is applied based on this wrong assumption. Only one month’s worth of the pensioner’s annual tax-free personal allowance of £12,500 will be applied, leaving them to pay income tax on £8,958 of the withdrawal even though the total amount taken falls below the taxable threshold. HMRC returns the overpayments once the kink in the system has worked itself out or when savers fill in a rebate form.

Despite the record refunds, Tom Selby of brokers AJ Bell said many pensioners could be unaware that they are paying over the odds.

“Given most people don’t fill out these forms, this is almost certainly the tip of a sizeable iceberg,” he said. “The system is simply not fit for purpose.”