If you find yourself inside IR35, you may decide that the best option for your payroll is an umbrella company – and you’d probably be right. However, you must understand how umbrella companies work, and how IR35 legislation is changing the way contractors are being paid. Keep reading and discover more about using an umbrella company when inside IR35.
Quick background to IR35
The government introduced IR35 legislation in 2000 to stop disguised employees from taking advantage of tax breaks by opting to work through an intermediary (for example, a limited company). In recent years, changes to IR35 have been rolled out – often referred to as off-payroll in the public sector (2017) and off-payroll in the private sector (2021). A majority of contractors working through a personal service company (PSC) are no longer able to determine their IR35 statuses, and instead, this is the responsibility of the end-client.
Working inside IR35
If you’re inside IR35, you are operating as a permanent employee in the eyes of HMRC. Therefore, you are not able to pay yourself with a combination of dividends and salary. Instead, you’ll need to be taxed by the fee-payer in the supply chain, and you’ll receive your net salary (PAYE).
As a result, there are not many benefits to continuing to contract through a limited company – at least for assignments inside IR35. This is why there has been a rapid increase in demand for umbrella companies – because they provide a hassle-free PAYE payroll service for contractors impacted by IR35 legislation.
You can still use your limited company
Changes to IR35 have not put an end to contracting through a limited company. You are still fully entitled to go and look for assignments that are outside IR35 – so that you can benefit from higher pay retention. However, using an umbrella company when inside IR35 is something you should consider. Umbrella companies are compliant, efficient and do not have a tie in period – meaning you’re free to use their umbrella company payroll when you need it and then return to your limited company when you’re able to.
How do umbrella companies work?
When you register with an umbrella company, you become an employee of theirs. The registration process will take around 15 minutes, and you’ll need to answer several questions about yourself and provide proof of your identity. Once you’ve completed the sign-up process, getting paid is easy. All you need to do is submit signed timesheets to the umbrella (and usually your agency, too), and you’ll be paid your net salary at the agreed frequency.
As your employer, umbrella companies operate PAYE – Pay As You Earn. This is HMRC’s tax system designed to ensure employees pay the correct tax. It’s no secret that umbrella company contractors will see a reduction in their pay retention compared to operating through a limited company – outside IR35. However, if you are inside IR35, umbrella companies offer an easy payroll service – when you need it.
Top 10 umbrella companies
If you’re interested in finding out more about umbrella companies, or perhaps you’d like to request an umbrella company calculation, please visit our top 10 umbrella companies. They’re all FCSA accredited, and some of them have special offers at the moment!