IR35, short for "Intermediaries Legislation," is a set of tax regulations designed to identify and tax disguised employment. The primary aim of IR35 is to ensure that individuals who work like employees, but through their own limited companies or other intermediaries, pay taxes in a manner consistent with employees. It applies to both limited company contractors and umbrella company workers, considering national minimum wage and tax avoidance.
The IR35 rule decides if an individual would be treated as an employee in the absence of an intermediary (like a limited company).
If someone is identified as a disguised employee, they will be liable for standard employment taxes on their contract earnings.
In 2017, new Off-Payroll working rules were introduced for public sector contractors due to observed non-compliance with the original IR35 regulations.
These regulations were expanded to private sector enterprises in April 2021. The updated rules assign the responsibility of deciding a worker's IR35 status to end-clients.
For those employed by small businesses, self-certification of IR35 status is still permissible, as was the case before 2017. However, if you are engaged with any other business or organization, your client must determine your IR35 status.
Key Concepts of IR35:
Scope and Applicability:
IR35 applies when a worker provides services to a client through an intermediary, like a limited company, but would be classified as an employee if contracted directly. The legislation is intended to prevent the use of this business structure for tax avoidance.
Determining Employment Status:
The essence of IR35 lies in determining the employment status of the individual. Factors such as control, substitution, and mutuality of obligation are considered. If the working arrangement closely resembles that of an employee, IR35 comes into play.
Inside IR35 vs. Outside IR35:
When a contractor falls inside IR35, it means that, for tax purposes, they are considered an employee. Outside IR35 implies that the contractor operates genuinely as a business entity. The determination has significant implications for tax liabilities and National Insurance contributions. Use our inside vs outside IR35 assessment calculator to know your employment status and assess the impact the legislation has on your net income.
Compliance and Impact:
For businesses engaging with contractors, it's crucial to regularly review contracts and working arrangements. Ensuring that contracts accurately reflect the nature of the working relationship can help in avoiding IR35 complications.
Falling inside IR35 can lead to increased tax and National Insurance contributions. Contractors may find that their net income decreases, impacting financial planning. Employers may also face additional costs associated with employer's National Insurance contributions.
Non-compliance with IR35 regulations can result in penalties and fines. HMRC has the authority to investigate and enforce compliance. Businesses and contractors must take IR35 seriously to avoid legal consequences.
What is an Umbrella Company?
An umbrella company in the UK is a type of employment intermediary that acts as an employer for contractors and freelancers. It provides a convenient and compliant way for individuals to work on temporary contracts for different clients while enjoying the benefits of being an employee.
Role of an Umbrella Company for Contractors
Umbrella companies offer payroll services to contractors, freelancers and temporary workers, acting as employers who manage tax deductions and national insurance. They operate under PAYE and provide professional services while ensuring compliance with UK tax regulations. Contractors often consider umbrella companies to handle payroll and tax responsibilities effectively.
Does IR35 Apply to Umbrella Companies?
If you choose to contract through an umbrella company instead of your own limited company, IR35 does not apply.
When you work under an umbrella company, you are considered an employee of that company. This means that all your income is taxed as employment income.
The best part is, that you can put IR35 worries aside entirely – it's not something you need to be concerned about as your payments are subject to PAYE, ensuring that you're accurately paying the right amount for tax and National Insurance.
IR35 and Umbrella Companies
When working through an umbrella company, you are an employee and subject to paying income tax and National Insurance same as other types of employees.
IR35 does not apply as it specifically applies when providing services through an intermediary, usually your own limited company.
The key advantage of working with an umbrella company is not having to deal with this legislation.
When choosing an umbrella company, ensure IR35 compliance. Look for transparent pricing and competitive umbrella company fees. Assess customer service levels. Investigate industry reputation and experience. Evaluate payroll management technology for efficiency and accuracy. Seek out umbrella companies that have undergone audits by FCSA or Professional Passport.
if you are inside IR35, using an umbrella company is a wise choice as it ensures accurate payment of taxes and National Insurance Contributions through PAYE. On the other hand, if you're outside IR35, the best way to legally maximize your pay is by being the director of your own limited company (PSC) and paying yourself with a mix of dividends and salary.
Never pressurize yourself to adopt a payment structure that doesn't align with your legal requirements. If you have any queries, reach out to your end hirer and recruitment agency. Additionally, only register with an umbrella company, if you are completely satisfied with the terms they offer.
Frequently Asked Questions:
What is an IR35 Compliant Umbrella Company?
Many umbrella companies include the term "IR35 compliant" in their marketing, but this can be misleading. The reason is that all PAYE umbrella companies are inherently IR35 compliant since IR35 doesn't apply to them. There's no extra action an umbrella company takes to be IR35 compliant.
Don’t fall for umbrella companies stating they can help you retain more of your money by using different payment structures than PAYE. In reality, these could be tax avoidance schemes, and getting involved with them may lead to serious issues with HMRC.
Do I have to use an umbrella if I’m caught by IR35?
Not necessarily. While there's no tax benefit in using a limited company when caught by IR35, you might choose to maintain your company for potential future contracts that fall outside these rules.
Certain accountants operate umbrella companies under the same organization, providing you with the flexibility to seamlessly switch between trading structures based on the IR35 status of your current contract.
Can a Client Force Me to Use an Umbrella Company?
Since the April 2021 Off Payroll rollout to the private sector, many risk-averse clients have blanket banned limited company workers. If they incorrectly determine your IR35 status, they are responsible for any unpaid taxes.
As a result, a fair number of large clients will only hire you if you’re working through an umbrella company.
They can’t force you to do anything. You can either accept the contract (as an umbrella employee) or look for another contract.
Is an Umbrella Company Right for You?
Whether an umbrella company is right for you depends on your work preferences, administrative comfort, and financial goals. If you engage in varied or short-term contracts and seek a simplified administrative process, an umbrella company could be a suitable choice. It offers benefits such as holiday pay, sick pay, paid maternity or paternity leave, and pension contributions, treating you as an employee for tax purposes. Choosing an umbrella company is also beneficial if you prefer flexibility in moving between contracts without the administrative responsibilities of managing a limited company.
Can I Keep My Limited Company Operational?
If you want to use an umbrella company, you can keep your limited company operational. If you choose to undertake a contract within IR35, keeping your limited company operational could be advantageous. While the ideal scenario for maximizing pay retention is working outside IR35, taking one contract within it doesn't necessarily dictate the nature of all future jobs.
At GoForma we offer a Limited Company dormancy service where we'll help take care of all your filing requirements for 50% off our usual monthly pricing.
How Does IR35 Affect Umbrella Companies?
IR35 doesn't directly impact umbrella companies. If you work through an umbrella, you're treated as an employee, and IR35 concerns are managed by the umbrella, not the individual contractor.