As a contractor, one of the most important pieces of legislation that will affect you is IR35. Our latest article provides everything you need to know about umbrella companies and IR35.
Everything you need to know about IR35
IR35 is UK tax legislation that aims to close the loophole in the tax system whereby contractors could legally make savings on income tax and National Insurance as a company providing a service to the end client even though they were working in a similar way to permanent employees—who did not benefit from the same tax breaks. Therefore, IR35 was introduced to stop contractors from working as ‘disguised employees’ by taxing them at a rate similar to employment.
New rules for applying IR35 in the public sector, otherwise known as the off-payroll working rules, came into force on 6th April 2017. As a result, all public sector end clients engaging temporary workers are responsible for determining the workers’ IR35 status—prior to this point, it was the contractor’s responsibility. If a contractor is deemed inside IR35, the fee-payer must deduct income tax and National Insurance at source (before the contractor is paid).
In April 2021, off-payroll in the private sector was rolled out. Similarly to the off-payroll rules in the public sector, it is now the responsibility of all large and medium-sized private sector end clients to determine the IR35 status of a temporary worker. The fee-payer must also ensure the correct income tax and National Insurance Contributions are paid if it’s determined the contractor is operating inside IR35.
Another change that was implemented alongside the off-payroll in the private sector rollout in 2021 was the implementation of a Status Determination Statement (SDS)—applicable to both public and private sectors. An SDS is a document that states the outcome of an IR35 status assessment—either inside or outside IR35—and the reasons for that outcome. The end client produces the SDS and should give it to the temporary worker before the engagement begins.
Umbrella companies and IR35
If your end client has determined, following an IR35 status review, that you are inside IR35 as the terms of your engagement are similar to those of a permanent employee, you must get paid via Pay As You Earn (PAYE). Getting paid via PAYE means it is the responsibility of the fee-payer to deduct income tax and National Insurance from your wages and pay these to HMRC each time you are paid. A net payment (amount after tax deductions) will be made to your bank account.
Registering and working via an umbrella company is one of the easiest ways to work if your contract is inside IR35, as you are considered an employee of that company. This means that all your income is taxed as employment income – just like a permanent employee. The best part is that you do not need to worry about IR35 as your payments are subject to PAYE, ensuring that you’re accurately paying the right amount of tax and National Insurance to HMRC.
What are your options if you are outside IR35?
If you accept a contract outside IR35, you can continue using an umbrella company for your payroll if you’d prefer. However, as the contract is outside IR35, you have the option to get paid through your limited company (if you have one) or set up a limited company if you do not already have one. As a limited company director, you can receive income from your limited company via salary and dividends. This is a more tax-efficient way of operating compared to getting paid via an umbrella company.
Benefits of using an umbrella company if you are inside IR35
When you register with an umbrella company, you can be onboarded and ready to get paid for your assignments in under 10 minutes. There are also many benefits of using an umbrella company if you are inside IR35:
- Continuity of employment – Contractors working through an umbrella company will benefit from continuity of employment. This means you can move from assignment to assignment, work on multiple assignments alongside each other, accept different assignments with different end clients or recruitment agencies, and still be seen as having one employer – the umbrella company.
- PAYE – You will be paid via PAYE, and the umbrella company will deduct the required income tax and employee National Insurance amounts and pay this to HMRC on your behalf. Providing you use a compliant umbrella company, you can rest assured you are paying the correct amount of tax.
- Employee benefits – When you register with an umbrella company, you become an employee of theirs and have the same employment rights as any other employee in the UK. Statutory employee benefits include sick pay and maternity/paternity pay.
- Workplace pension auto-enrolment – As an employee of an umbrella company, you will be auto-enrolled into a workplace pension scheme where you meet the qualifying criteria. Please note you can opt out of the pension scheme if you do not want to use it.
- Insurance cover—Most umbrella companies offer a comprehensive insurance package that includes Public Liability Insurance, Professional Indemnity Insurance, and Employers’ Liability Insurance.
- Ongoing support—When you register with an umbrella company, you will receive ongoing support, and they will be on hand to answer any questions you may have.
- Additional extras—Many umbrella companies offer additional services that could benefit contractors. For example, Umbrella Company UK offers a salary sacrifice service for contractors and freelancers who are interested in saving tax-efficiently for retirement.
Please click here to find out why you should consider using an umbrella company for inside IR35 assignments and the benefits of using Umbrella Company UK for your payroll.
Are you looking for an umbrella company?
If you are deemed inside IR35 and are looking for an umbrella company – Umbrella Company UK offers a compliant way to get paid. We are an FCSA-accredited and SafeRec-certified umbrella company.
As part of our service, you will receive free insurance cover worth £25 million, employee benefits including sick pay and maternity/paternity pay, access to My Digital (our online portal and app), Same Day Faster Payments, a quick and easy registration, and ongoing support from our dedicated Onboarding and Customer Service teams.
To learn more about our umbrella service, please call our friendly team on 01707 669023. You can also request a tailored take-home pay calculation or request a callback at a time that suits you.
