An online calculator that compares the cost of running a contract payroll versus PAYE will tell recruitment companies the real financial impact to their business of complying with the new IR35 off-payroll rules that come into force on 6 April.
According to the calculator’s developer HIVE360, an employee benefits and outsourced payroll provider which operates extensively in the GLAA* and industrial recruitment sector, it uses four pieces of information – hours worked, client hourly rate, umbrella hourly rate, and the umbrella fee – to calculate the weekly, monthly and annual cost for recruiters paying workers using a PAYE payroll vs paying them as contractors.
HIVE360 estimates that recruitment businesses opting to set-up and run an in-house payroll of 400 workers, should expect to add over £30,000 each year to their bottom line to cover administration and resource costs.
For those opting to use the alternative of an umbrella company to pay workers, there will also be significant additional costs once IR35 takes effect – they will pay more tax, but also be charged for the privilege, with the average umbrella company charging on average £20 per worker per week, around £1,000 a year based on an average £18,000 salary.
“When IR35 legislation changes on 6 April 2021, recruitment businesses have three options,” says David McCormack, CEO of HIVE360. “Either return to in-house payroll, cut workers’ pay, or outsource payroll to a recommended PAYE-compliant specialist.
“The online calculator will help them decide by converting contract rates to a PAYE rate for immediate comparison – no doubt busting a few myths and delivering some very surprising outcomes, both in terms of worker take-home pay and agency costs.
“Whilst we all need to accept the one inevitability of the new IR35 off-payroll rules – there will be more tax to pay – some of the tactics being invoked are leaving recruiters with an additional financial overhead.
“Not only this, they also face a tough decision on how to cover the increased costs to their businesses or to their workers – such as a cut of at least five percent to workers’ pay to cover the additional costs if they force workers down an umbrella route.”
Workers are better off financially being paid via a PAYE model, he says: “When you deduct the weekly fee and all costs of employment going through an umbrella and see the real ‘take-home pay’ for workers, you have to ask if the vanity of a higher umbrella rate (and we all know it’s not really a higher pay rate) is stopping your workers moving to PAYE, which is the ‘IR35 safe solution’.”
The upcoming changes to IR35 legislation mean that after 6 April, businesses in the public and private sector engaging workers through intermediaries, must identify whether the worker is classified a direct employee for income tax purposes.
Recent figures** suggest that approximately 60,000 medium and large-sized engagers and potentially 20,000 recruitment agencies will be affected by the changes to IR35 off-payroll legislation.
“Businesses need to act fast to ensure their payroll is fully compliant and minimise disruption to their organisation,” says David McCormack.
Hive360 is a GLAA (*Gangmasters and Labour Abuse Authority) license holder and champions a new model of employment administration for the UK market. It is leading the way in innovating employer engagement via its suite of employee benefits that match individual business requirements with a tailored, personal solution, to provide a ‘bridge’ between an employer and its workforce with pioneering technology-based solutions.
For more information: Hive360 | Payroll & Benefits Reimagined