While apprenticeship levies might be a problem for umbrella companies, contractors who work for Personal Service Companies should also think about them.

The imminent reforms of IR35 mean that end-clients and agencies are considering how they will payroll PSC contractors. When an agency is considering working with a PSC in the public sector, the agency must consider how all employment taxes will be processed if the PSC is considered to be inside IR35.

Many consider that this will lead to PSC contractors increasing their rates to cover additional costs. The daily contract rate will have to account for Employer’s NIC, at a rate of 13.8%. In addition, it will also need to cover the 12% Employee’s NIC, and income tax. This would be a substantial amount if the contractor wishes to retain an income equivalent to that outside IR35.

However, if the agency decides it will process payments to the PSC via their own payroll, they may be caught by the apprenticeship levy. If by processing the payments via their own payroll, the total figures rise to above £3 million, then the agency may need to negotiate further rate changes to cover the half a percent levy.

What this means is that a contractor who earns £500 per day will likely leave a bill of £50 per month for the apprenticeship levy. The current legislation prevents the agency from deducting this cost directly from the contractor’s money.

PSC contractors may see a drop in their rates to cover the apprenticeship levy.