Blog post written by Orange Genie
If you’re used to contracting through your own limited company and you’ve been asked by your agency or client to use an umbrella company instead, it’s probably because you’ve been found to be inside IR35.
In most cases this means your take home pay will be reduced, and this has led many desperate contractors to accept bad advice and fall into tax avoidance schemes. There’s also some confusion about what’s happening and what the rules are, so in this article we’ll share what you need to know about IR35, discuss what your options are, and look at how you can protect yourself from exploitation.
What’s this about IR35?
IR35 is legislation aimed at preventing so-called “disguised employees” receiving a tax advantage by working through an intermediary, like your limited company. In most cases your end client has to decide whether you’re employed for tax purposes (inside IR35), or in business on your own account (outside IR35).
If they find that you’re inside, your income from that contract is subject to PAYE tax and National Insurance.
If you’re used to contracting outside IR35 through your limited company, being inside will mean you take home less money, unless you’re in a position to negotiate an increase to the rate.
This will be the case whether you continue to trade through your PSC, or switch to umbrella employment.
Can you continue trading through your limited company?
In theory, yes you can, but this relies on the agency/client being willing and able to deduct PAYE tax and National Insurance from payments made to your company. It also means you’ll be funding your company from taxed income, which obviously isn’t ideal.
If some of your contracts will be outside IR35 you might want to keep your limited company for those contracts, and use an umbrella company when you’re inside, where this is practical and possible.
Why have you been asked to choose an umbrella company?
If you’re inside IR35, umbrella company employment is usually the best option, particularly if you expect to be inside for most of your contracts.
You’ll take home roughly the same amount of money, and you won’t have to pay running costs for your company.
You’ll also have full employment rights, including sick pay, holiday pay, maternity/paternity pay and access to a workplace pension.
If your umbrella company has found a clever way around IR35
We’re very sorry, but they haven’t. They’re lying to you, so they can risk your financial future for their own profit. All umbrella companies work under the same rules and the industry is highly competitive – if there was a legitimate way to pay you more, everyone would be using it.
Whatever the scheme is, we can guarantee that it doesn’t work and the consequences for you could be very bad indeed. A great many contractors have received life-changing tax bills because they believed claims like this.
Can your umbrella company pay your limited company?
We’re seeing this question quite a lot, particularly in the healthcare sector which has been specifically targeted by non-compliant companies, probably because of pressure on rates of pay.
If your umbrella company is suggesting that they will make payments to your limited company, please remember:
- A compliant umbrella company will employ you. It makes no sense at all for them to pay your employment income to another party – even a limited company owned by you.
- The only reason anyone might want to do this is to attempt to disguise your employment income as something else, to avoid paying the correct amount of tax.
- HMRC will not be fooled, and neither should you.
How to protect yourself
The potential consequences of getting involved with tax avoidance schemes are difficult to overstate. Aside from the looming future tax bill that will land when HMRC turn their attention to your case, you’re trusting your money and employment to someone who is willing to break the rules, and in most cases to lie to you about it. You don’t need us to tell you how risky that could be.
When considering whether to join an umbrella company, look out for these “red flags”
- A promise that you’ll take home a high percentage of the contract rate
- The amount of money you’ll take home is the main selling point
- Part of your salary will be paid as something else
- Payments from your umbrella are routed through several different companies before coming to you
- Your employment status is unclear, or anything other than “employed by the umbrella company”.
The most effective way to protect yourself and take the jeopardy out of your search for an umbrella company, is to look for a respected accreditation. For example, FCSA members have all been assessed against a demanding compliance code, and they’ve demonstrated competence, integrity and financial stability. You can be sure they care about doing things correctly, and they won’t put you at risk by using tax avoidance schemes.
Orange Genie hold long-standing FCSA accreditations for our umbrella company employment and specialist contractor accountancy services, so we’re ideally placed to advise on the best option for your circumstances. If you have questions, or if we can help in any way, please call our expert team on 01296 468483 or email info@orangegenie.com.