Off-payroll in the private sector will be coming into effect in a matter of weeks (6th April 2021). It will mean that many contractors who currently work through their limited company can no longer determine their IR35 status. If you’re deemed inside IR35, you may find working through an umbrella company a beneficial option from now on.
What is an umbrella company, and how does it work?
Umbrella companies exist to process the payroll of temporary workers engaging with multiple assignments and end-clients. They offer an alternative way of operating if the contractor does not want to or cannot set up their own limited company, is deemed inside IR35 or for those who prefer a more straightforward approach to contracting.
When you register with an umbrella company, you will become an employee of theirs and have access to the same employment rights as any other employee. These benefits include statutory benefits such as Sick Pay and Maternity/Paternity Pay and auto-enrolment into a workplace pension scheme if you meet the qualifying criteria.
When you are due to be paid, your agency, or end client, will transfer funds to your umbrella company for your assignment rate; this includes your PAYE rate and the associated employment costs. The umbrella company will make the appropriate tax and National Insurance Contributions (NICs) and pay these to HMRC on your behalf (PAYE).
Working through an umbrella company is as simple as it sounds; you do not need to remember to put aside money to pay a tax bill or invoice your client for the work you have done – the umbrella company will do it all for you.
It is important to note that all umbrella companies have to abide by the same tax rules set out by HMRC. This means that there will be very little difference in your take home pay between providers and the only thing that should vary is the umbrella company’s weekly or monthly margin. If an umbrella company is offering you a significantly larger take home pay rate, they are almost certainly a tax avoidance scheme and you should avoid them at all costs! Engaging with tax avoidance schemes could land you in a lot of trouble with HMRC, and you could end up owing thousands of pounds in unpaid tax.
Why contractors may find working through an umbrella company beneficial
Due to off-payroll reforms in the private sector, many contractors may find that for contracts inside IR35, they will benefit from working via agency PAYE or an umbrella company. This is because it is the fee-payers responsibility to make the necessary tax deductions before paying your net earnings to you – regardless of whether you work through a limited company, umbrella company or agency PAYE. As many recruitment agencies do not operate their own PAYE arrangements, they will recommend using an umbrella company to process your payroll. In most cases, the agency will have a Preferred Supplier List (PSL) of providers that they encourage their contractors to choose from. However, if they do not, always look for the FCSA accreditation to ensure the umbrella company is compliant.
For assignments inside IR35, there are really no benefits to operating via your limited company, as the tax benefits have been removed. However, unlike working through your limited company on contracts inside IR35, you can take advantage of a host of benefits when you work through an umbrella company. These include access to statutory employee benefits such as Sick Pay, free insurance as part of the service (Employer’s Liability, Public Liability and Professional Indemnity Insurance), a full payslip history which can be used for references for credit such as a mortgage, continuity of employment, and umbrella companies can be used for any role in any industry.
Choosing a compliant umbrella company
In recent years, the need for umbrella companies has drastically increased, and with it, so has the number of providers offering their services. A quick Google search highlights how many there are to choose from, and it can be hard to tell which are compliant and which are not if you have never used an umbrella company before. We’ve compiled a short checklist of points to consider when deciding which umbrella company to use:
- Are they FCSA accredited?
- Are they on any recruitment agencies PSL?
- Are they well established in the market and knowledgeable about the contractor industry?
- Are they based in the UK and have a registered office in the UK?
- Are they transparent about all of the tax deductions that will be made to your pay?
- Do they comply with all legislation, for example, IR35? And can they provide detailed information about how this will affect you?
- Is their website easy to use and informative? Can you contact them via phone and email?
Register with an FCSA accredited umbrella company today
If you are looking for a trustworthy, FCSA accredited umbrella company – look no further than Umbrella Company UK. We are backed by professionals with over 20 years’ experience in the contractor payroll industry and have supported hundreds of happy clients on their contracting journey.