Should you stay Limited or go Umbrella when found ‘inside IR35’?
With the impending April 2020 changes to IR35 legislation, what should you do if you find your latest contract has been found ‘inside IR35’? If you’re in a situation where you’ll temporarily need to work on a PAYE basis, one way of doing so is through an Umbrella company. In this blog, Intouch’s Operations Manager Neil Kellaway reveals your options, and how to decide what’s right for you.
What’s your take home pay if you’re found ‘inside IR35’?
If your contract is found ‘inside IR35’, and you decide to continue using your Limited Company, a calculation is made each year by your contractor accountant to determine the ‘deemed salary’. This ‘deemed salary’ calculation is purely a calculation of the Income Tax and National Insurance due. This is then paid to HMRC.
The ‘deemed salary’ calculation follows the tax year (6th April to 5th April) rather than your company year (if you’re used to contracting through your Limited Company). Contractors found ‘inside IR35’ may choose to pay a small salary throughout the year, or request their contractor accountant estimates what their deemed salary calculation may be, and pay a monthly salary that’s in line with that. The benefit of doing so is that the tax due is spread across the whole year, rather than one large lump sum right at the end.
Through a Limited Company
This option will involve the fee payer, usually the agency in the chain, deducting the Income Tax/NI from the pay. The first thing that will happen is the Employers NI of 13.8% will be deducted from the day rate agreed in the contract. The remaining amount will then be taxed as gross pay like an employment, so with the deductions of income tax & employees NI. The net pay plus any VAT that was charged on top of the day rate will be paid into the Ltd Company. The net pay transferred to the Limited Company can then be transferred straight to your personal account. This won’t be taxed again, as this was already taxed at source. We at Intouch will ensure the correct treatment of this pay is updated in the Accounts, for when the Statutory Accounts and Company Tax Return is completed. The VAT, that is transferred back in addition to the net pay by the fee payer, is then dealt with when completing the quarterly VAT return as normal.
Through an Umbrella company
This option is much easier from an admin perspective. The fee payer in this scenario will be the Umbrella company. The Umbrella company will do the exact same thing, deduct the employers NI from the day rate agreed, before calculating the income tax and employees NI. The net pay is then transferred directly to you, as an employee of the Umbrella company.
What is an Umbrella company?
An Umbrella creates an overarching contract between yourself and your hirer and deals with your admin, payroll and tax. Your client will pay your hirer who then passes it onto your Umbrella company, where they’ll deduct your National Insurance, income tax and processing fee. They will then pay you the remaining amount, similar to the way in which you’d be paid when in permanent employment.
Do you take home more or less when using an Umbrella company?
Typically a contractor will take home less as Umbrella companies do not allow you the freedom to influence the timing of your income taxation, have lower rates of corporation tax on ‘surplus cash’, or reduce your National Insurance costs in the same ways in which Limited Companies can do.
So what’s the best option – use an Umbrella or continue to use your Limited Company?
It’s a decision only you can make, but one certainly you should discuss with your Personal Accountant, as they can advise how you’d be better off – both financially and professionally. Whilst using an Umbrella may mean you’re financially worse off for that particular contract, is the client someone who could open future doors and opportunities? Would the type of work broaden your knowledge and expand the industries in which you work? Ask yourself if it’s worth turning down a contract purely for financial reasons.
Be aware though that using an Umbrella when found ‘inside IR35’ doesn’t necessarily mean you’ll financially be worse off, nor does it mean the opposite. Each contract along with it’s own unique circumstances will mean one option will leave you with more take home pay, and only an expert accountant will be able to determine this for you. So remember to always run it past your accountant before you make any decisions.
How can Intouch support your decision?
Your dedicated Intouch Accountant – When you become an Intouch client, you’ll be introduced to your own dedicated Personal Accountant and be given their direct phone number and email address. So whenever you have a question regarding a new contract, they’re on hand to guide you through your options, consider all of the facts and help you decide which trading option is best for you.
Our unique IR35 services – After discussing your contract with your Personal Accountant, should you decide to use an Umbrella company, our Freeflex service can do just that, by giving you the safety net to switch freely between your Limited Company and an Umbrella solution with little disruption. We keep your Limited Company’s day-to-day activities running in the background while you use Intouch Umbrella, then have it up-to-date and ready to start back up whenever you wish. Plus, you’ll still have full access to your accounts via the Intouch cloud-based portal, and unlimited contact with your Personal Accountant.
The final decision lies with you…
…but with Intouch you’re never alone to make that decision! Find out more about our IR35 services and how our team of expert Contractor Accountants can help you contract in a way that’s best for you – both financially, professionally and personally.
This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.