Umbrella companies and IR35 off-payroll rules
Off-payroll rules are due to impact the private sector in April 2021, handing over the responsibility of IR35 assessment from contractors to hirers. Working under an umbrella company is a way for contractors to be paid, and it’s becoming a popular choice due to the pending legislation.
Read on to find out how IR35 impacts contractors and what this will mean for operating under umbrella PAYE in the next tax year.
A simple summary of IR35
IR35 applies if HMRC deems a contractor operating as a limited company to be a ‘disguised employee’. In other words, an individual who functions like permanent staff while paying fewer taxes due to claiming not to be. This is referred to as being inside IR35, and it’s determined by many factors relating to the level of control the client has over the work.
The legislation first came into effect for the public sector in 2017. Upcoming changes in April 2021 mean IR35 will also impact medium and large businesses in the private sector. The responsibility for assessing IR35 status will thus turn from the contractor to employers, with the intention of reducing the amount of incorrect assessments.
Read our article on everything you need to know about IR35 for a complete guide to the legislation.
How umbrella companies are affected by IR35
When a contractor works through an umbrella company, they become an employee. This means standard income tax and National Insurance contributions apply. As the contractor is an employee and not a limited company working as such, IR35 will not apply as they already pay the correct taxes.
Those inside IR35 may choose to work through an umbrella company due to reduced paperwork and to ensure taxes are managed correctly. However, doing so reduces the contractor’s ability to optimise their taxes. While limited companies would previously determine their own IR35 status, this will now turn to the hirer.
When the legislation hit the public sector in 2017, many contractors were placed inside IR35 so that standard contributions were paid, and fines were avoided. However, this was widely criticised as they didn’t receive any employment benefits despite paying the same level of taxes. With an umbrella company, contractors receive employment benefits like statutory pay and business expenses.
It’s expected that many more contractors in the UK will turn to an umbrella company ahead of the planned changes. Not only does this offer benefits for the contractor, but it’s appealing for the recruiters who would otherwise need to assess IR35 status themselves. That being said, handy tools like PSC Guard provide insured determinations quickly and conveniently.
Be aware of non-compliant umbrellas
Since the changes to the public sector in 2017, there’s been a rise in the number of fraudulent umbrella companies. As all are bound by the same rules, employees should receive a similar salary regardless of which company they choose, allowing some margin for their fees.
However, some companies took the opportunity to entice contractors, who were hungry for the most efficient deal, with a non-compliant service. Promises of incredible tax savings instead led to tax evasion and HMRC requesting back payments for the involved contractors.
To combat this, contractors should weigh up their options and avoid anything that seems too good to be true. To maximise cost-effectiveness, service fees and eligible employee benefits should be considered.
The change to off-payroll work in the private sector is looming. Stay updated on key updates and advice on our news section.