Changes to off-payroll in the private sector are set to roll out in April 2021. They may be a year late, but they’re coming! It’s expected that several limited company contractors may find themselves inside IR35 at some point in the future, and as a result, umbrella companies may see a rise in demand. We’ve collated some useful tips for limited company contractors who may need to use an umbrella company at some point in the future. Keep reading to find out more.
Understand the rules (off-payroll in the private sector)
IR35 is not a new piece of legislation, but since its introduction in 2000, it’s undergone numerous tweaks. Ultimately, IR35 is the government’s way of ensuring contractors pay the correct amount of tax. Genuine contractors can continue working outside IR35 through a limited company. However, contractors working in the same way as permanent employees are required to be taxed accordingly (PAYE).
Before changes to off-payroll, contractors were responsible for determining their IR35 statuses. However, changes were rolled out into the public sector in 2017, and the responsibility was transferred to the client (public sector body). Very similar changes are coming to the private sector in April 2021, and contractors will no longer be able to decide if they’re inside or outside IR35. Instead, it’ll be the responsibility of their end-client – the private sector organisation they’re working for.
Many organisations are fully prepared
We’ve read that loads of organisations have reliable and thorough IR35 assessment procedures in place already. Therefore, if you’re genuinely outside IR35 – you shouldn’t have anything to worry about, and you should be able to continue operating through your limited company.
And, it’s not just the “end-clients” who are doing their bit to understand IR35 and to implement assessments fairly. Recruitment agencies are helping their clients make rational and accurate IR35 assessments, and they’re working closely with them to create dedicated assignments that are outside IR35.
Also, it’s worth remembering that there are numerous “tax status specialists” out there and they’re working with agencies and clients throughout the UK and are helping them prepare. And, on that note, we mustn’t forget the rise in software. The government has produced its own IR35 assessment tool (CEST), but independent platforms are growing in number too.
This isn’t the end of limited company contracting – so it’s probably worth keeping your limited company operational
Just because you find yourself inside IR35 at some point in the future, it doesn’t mean all your upcoming assignments will have the same fate. Speak with your current accountant and see if they offer a dormancy service. Most contractor accountants will be able to keep your limited company ticking over for a significantly reduced fee, so you’re free to return to it down the line.
Umbrella companies are there to offer a payroll service if and when you need it. There is no tie in period, and you can “come and go” as often as you like – without having to pay to join or leave.
Make sure you are fully confident with how umbrella companies work
If the concept of using an umbrella company is new to you, the idea may sound a little daunting. However, there are plenty of resources out there to help you get your head around how umbrella companies work – just like our website!
To put it simply – when you register with an umbrella company, you’ll become their employee, and they’ll pay you your net salary after all of the legal deductions have been made (PAYE). All of the deductions that you’ll see on your payslip are sent directly to HMRC, with the one exception being the umbrella company’s margin.
The only income that umbrellas generate for themselves is the margin they charge for processing your payroll, and typically this is around £15 to £25 per week.
Discuss your payroll with your client and agency, and enquire about the prospect of a rate uplift
The chances are, if you’re inside IR35 having previously been outside IR35, your pay retention will decline. Why? Because you’ll no longer be able to pay yourself with a combination of salary and dividends.
If you find yourself in this situation, it’s well worth speaking with your agency or client and explaining that your pay retention is set to decline. Ask them for an uplifted rate. After all, we all know the old saying – “if you don’t ask, you don’t get”. Plus, many organisations will have sympathy for their temporary workforce.
Choose an FCSA accredited umbrella company
If you are required to use an umbrella company, make sure you choose a compliant one. Compliance is critical. Frustratingly, there are unethical tax avoidance schemes targeting limited company contractors. These schemes are deliberately encouraging contractors to pay less tax. If you’re found to have used a tax avoidance scheme by HMRC, you could face severe penalties.
The FCSA is the UK’s leading professional body dedicated to ensuring the supply chain of temporary workers is compliant. For an umbrella company to have obtained FCSA accreditation, they will have undergone a thorough assessment process and audit. As a result, they’ll have successfully proven they are operating in accordance with UK tax law and HMRC regulations.
If you’re interested in finding out more about umbrella companies, we recommend you look at our top 10 umbrella companies list. Every umbrella in our top 10 is FCSA accredited, and some of them have excellent offers on at the moment.