If you’re a contractor, freelancer or temporary worker, you should be up to speed with IR35 and how it works. However, regardless of your IR35 status, you may not be familiar with umbrella companies and how IR35 will apply should you use one at some point in the future. This article sets out to summarise IR35 legislation and explain how IR35 affects contractors and freelancers who decide to get paid with a PAYE umbrella company.
IR35 overview
The government introduced IR35 to stop ‘disguised employees’ from benefiting from tax breaks not intended for them. To put it very simply, if you’re outside IR35, you’re genuinely self-employed in the eyes of the government. However, if you’re inside IR35, you’re working in the same way as permanent employees, and as a result, you will be required to be taxed in a very similar fashion (PAYE).
IR35 and umbrella companies
Umbrella companies offer a reliable payroll service (PAYE) for contractors, freelancers and temporary workers who find themselves inside IR35.
If you decide to use an umbrella company, you will not have to worry about IR35 because you’ll be paid like a permanent member of staff (PAYE). Therefore, you could technically argue that umbrella companies are IR35 compliant. However, the most important thing is ensuring your assignment has been fairly assessed in regards to its IR35 status. Therefore, you should be issued a Status Determination Statement (SDS) from your end-client. The SDS should explain precisely how the hirer came to decide whether your assignment is inside or outside IR35. If you disagree, information on how to appeal should be made clear.
Using an umbrella company for your payroll is not the most tax-efficient way to get paid. Contracting with a PSC is while working outside IR35 (as we cover in the next section). However, by using an umbrella company, you don’t need to worry about IR35, because your payments will be subjected to PAYE – meaning you’re paying the correct amount of tax and National Insurance Contributions. There are no risks involved, and you’ll be compliant with UK tax law.
Umbrella companies are generally regarded as the best payroll solution for contractors working inside IR35. They ensure the correct tax is paid, and there is hardly any administrative responsibilities. And, HMRC acknowledge umbrella companies as legitimate payroll service providers for temporary workers. We recommend you read their latest guidance: Working through an umbrella company.
We’ve noticed that some umbrella companies advertise themselves as “IR35 compliant”. This is a little odd. Don’t be tricked into believing some umbrella companies can help you retain more of your money by using different payment structures than PAYE. These are almost certainly tax avoidance schemes, and engaging with one could land you in serious trouble with HMRC. All compliant umbrella companies will operate Pay As You Earn (PAYE).
If you decide that using an umbrella company is the best option for you, make sure you choose a compliant one. Our advice to temporary workers is only to use FCSA or Professional Passport accredited providers. These two regulatory bodies are committed to ensuring the supply chain of temporary workers in the UK is compliant. Therefore, accredited companies have undergone a series of assessments to ensure they operate compliantly and ethically.
Contracting with a PSC remains the best way for contractors to legally maximise pay retention
The best way for contractors, freelancers and temporary workers to legally maximise their pay is to work on outside IR35 assignments through a personal service company (PSC). This will allow contractors to withdraw a combination of salary and dividends from the company – the most tax efficient way to get paid.
The problem lies with making IR35 assessments. In the past, contractors were free to determine their IR35 status. However, this changed in the public sector with changes to off-payroll working rules. From April 2017, public sector contractors were no longer able to make their own IR35 assessments. Instead, this became the responsibility of the end-hirer. Similar changes rolled out into the private sector in April 2021.
If you need to use an umbrella, you can keep your limited company operational
Should you decide to take an assignment inside IR35, did you know you are probably better off keeping your limited company operational (if you have one)? We understand that the best way to maximise pay retention is working outside IR35. Therefore, just because you take one assignment inside IR35 doesn’t mean all future jobs will be the same!
Many contractor accountants will offer an inactive service, and some will even have in-house umbrella payroll for limited company directors working inside IR35.
Conclusion
The general rule of thumb is this – if you’re inside IR35, using an umbrella company is a good idea because they’ll ensure you pay the correct tax and National Insurance Contributions (PAYE). If you’re outside IR35, the best way to legally maximise your pay retention is being the director of your own limited company (PSC) and paying yourself with a combination of dividends and salary.
You should never feel pressured into using a payment structure you don’t feel comfortable with. If you have any questions at all, speak with your end-hirer and recruitment agency. Also, only register with a third party (such as an umbrella company or contractor accountant) if you’re entirely satisfied with what they’re offering.
Top 10 umbrella companies
If you’re working on an assignment that’s inside IR35, you may decide to use an umbrella company for your payroll. To help make your decision easier, we’ve collated a top 10 umbrella companies list for you. Each company is accredited by either the FCSA or Professional Passport, and some have special offers at the moment.
