We’ve noticed a lot of contractors moaning about their umbrella company because of pay retention. Nobody wants to lose large chunks of their income in taxes, but unfortunately, we all have to contribute to society. It’s not the umbrella company’s fault you’re inside IR35, and we’ll explain more in this article.
Your IR35 status will impact your pay retention
Since the introduction of IR35 in 2000, there have been two main ways for temporary workers to get paid. The first option involves working through an intermediary while outside IR35 – usually a personal service company (PSC). Option two is using an umbrella company – perhaps the best solution for workers inside IR35.
It’s no secret that contractors outside IR35 and working through a PSC can retain more of their money. In the eyes of HMRC, these workers are “self-employed”, and as a result, can pay themselves with a combination of salary and dividends. Don’t hold us to these figures, but PSC contractors can expect roughly 70-80% pay retention. However, this depends on individual circumstances.
For those who are deemed inside IR35 – HMRC believe they operate like workers in permanent employment. Therefore, they’re not allowed to pay themselves with salary and dividends through a PSC. Instead, they’re taxed at source and will receive their net salary with all deductions made (in most cases).
Umbrella companies process PAYE
Umbrella companies exist to process the payroll of temporary workers and operate PAYE. This means that the umbrella received the worker’s funds from the agency/end-client and then makes the necessary deductions to the gross salary (following HMRC’s rules and regulations). The contractor is then paid their net salary. Every deduction made to the contractor’s pay is sent to HMRC – except one – the margin. The umbrella company’s margin is the only income the umbrella retains for itself.
The point above takes us back to the title of this article – it’s not the umbrella company’s fault you’re inside IR35. Umbrella companies process payroll in accordance with UK tax law. Providing they’re compliant, they’ll ensure all employees pay the correct tax and National Insurance Contributions to ensure they never face an HMRC investigation in the future.
Whether you choose an umbrella with a low weekly margin (e.g. £15.00) or a high weekly margin (e.g. £30.00), your pay retention will not change very much. As umbrellas operate PAYE, you should expect to retain between 55-70% of your pay. It’s not the umbrella companies fault this may be lower than what you’re used to when operating through a PSC whilst outside IR35. The umbrella company is providing a black and white service, and they cannot do anything differently.
Unfairly being deemed as “inside IR35” is not okay
When off-payroll changes (IR35) came into the public sector in 2017, many organisations were unprepared and consequently rolled out blanket onside IR35 assessments for all their temporary workers. Doing this is not acceptable, and businesses are now required to prove they’ve conducted a fair review when they hand their temporary workers a Status Determination Statement (SDS). This official document confirms whether a worker is inside or outside IR35.
Off-payroll in the private sector changes were introduced in April 2021. It’s fair to say private organisations were better prepared than those in the public sector a few years ago. However, some still hadn’t grasped the concept of conducting fair IR35 assessments on their temporary staff. Consequently, some workers have found themselves inside IR35 unfairly.
If you believe you’ve been subjected to an unfair IR35 assessment, you have the right to challenge this with your end-client. They should have issued you with an SDS for your assignment, and they must explain why they concluded that you’re inside IR35. For more information, we recommend you liaise with an IR35 specialist, such as Kingsbridge Contractor Insurance.
Why do some umbrella companies promote high take-home pay retention?
Because they’re probably a tax avoidance scheme – that’s why! We’ve written loads about tax avoidance schemes on the Umbrella Companies website, and they’re to be avoided at all costs.
Unfortunately, unethical umbrella companies have been in the press a lot recently, and we recommend you read up on mini umbrella company fraud (MUC). To ensure you use a compliant umbrella company for your payroll, we recommend using FCSA, and Professional Passport accredited businesses only. These two are well known professional bodies committed to ensuring the supply chain of temporary workers is compliant and ethical. Should the umbrella marketplace be regulated in the future (which isn’t necessarily bad), these two organisations should be at the forefront of arranging proceedings with the government.
It’s not the umbrella company’s fault you’re inside IR35. If you’re fairly assessed as being inside IR35 – it’s not your umbrella companies fault. They’re paying you compliantly (PAYE). Should you wish to return to a PSC, we recommend you seek an assignment that’s outside IR35.
Top 10 umbrella companies
Our top 10 umbrella companies list only includes FCSA or Professional Passport providers. Therefore, it’s a great place to look when you’re trying to find a new umbrella company to take care of your payroll! And, some of them have special offers at the moment.