New IR35 rules introduced in April 2021 have led thousands of limited company contractors to reconsider their options. After all, contractors that fall under IR35 in the private sector are now facing considerably larger tax bills as they are subject to PAYE tax and National Insurance.
For this reason, many are now thinking about making the move to umbrella.
If this sounds familiar, Umbrella Broker’s handy guide outlines the benefits of making the move to an umbrella company this new tax year.
What do IR35 reforms mean for contractors?
First, let’s start by looking at IR35 and what it means for contractors.
IR35 is a piece of legislation that targets so-called ‘disguised employees.’
These are workers such as contractors that call themselves contractors but work more like employees, giving them access to the tax-advantages enjoyed by the self-employed.
IR35 legislation originally came into law in 2000 when it was the responsibility of the contractor themselves to establish their own IR35 status. However, this changed when HMRC considered that too many companies were not compliant.
In 2017, reforms to IR35 meant that in the public sector, it became the responsibility of the client to determine the contractor’s IR35 status. This led thousands of public sector contractors to be labelled as inside of IR35, regardless of their actual circumstances.
For these contractors, it then became the responsibility of the client to deduct their tax and National Insurance contributions from their fee before it was paid to them.
The problem here was that public-sector clients were not always accurate in their assessments of the contractor’s IR35 status, meaning thousands of contractors were paying more in PAYE tax and National Insurance Contributions than they needed to.
Why make the move to umbrella?
Now, as of 6th April 2021, it has similarly become the responsibility of the client in the private sector to establish the contractor’s IR35 status.
This is the case for all contractors unless your end client is a small business.
If you are found to fall under IR35, you will face considerably larger tax bills. Although you will have to pay PAYE tax and National insurance like an employee would, you will not receive the benefits enjoyed by employees such as statutory rights including holiday pay, sick leave and maternity/paternity leave.
This is a main reason that many contractors should now look to making the move to umbrella in 2021.
Advantages of an umbrella company
With an umbrella company, there is no need for the contractor to worry about IR35.
However, there are also a wider range of benefits to working with an umbrella company.
Contract the hassle-free way
Contracting through an umbrella company is typically considered an easy and hassle-free way of contracting.
Whereas a limited company contractor must source and secure their own contractor work, run their own business, sort out admin and paperwork, submit their self-assessment tax return putting aside money for this and submit invoices to the client, there is no need for the contractor to worry about such tasks under an umbrella company.
The umbrella company takes on these tasks for you, aiming to make the contractor’s life as easy as possible.
All the contractor must worry about is submitting their timesheet and the umbrella company will take care of the rest. That’s why thousands of contractors opt for the umbrella company route as an easy, hassle-free way of working.
Pay tax through PAYE
Unlike limited company contractors who work off-payroll and therefore have to file for self-assessment, umbrella company contractors benefit from paying tax through the PAYE system.
This is due to the fact that the contractor is made an employee of the umbrella company. The umbrella company will therefore pay the contractor a salary, deducting the correct amounts of tax and National Insurance from this before it is paid to them.
For umbrella contractors, this means no need to worry about saving for self-assessment and carrying out tricky tax calculations.
Receive employee benefits
As umbrella contractors are employed by the umbrella company, they are automatically entitled to employee benefits such as statutory rights.
These include sick pay, holiday pay, a workplace pension and maternity and paternity pay.
Again, this is considered as a big benefit to working through an umbrella company, giving contractors an extra layer of security. So, should you fall ill, or just want to take a well-earned holiday, you won’t have to pay for this out of your own pocket.
Enjoy flexibility and freedom
Umbrella company contractors can enjoy the freedom and flexibility of choosing which clients they work with and what contracts they work on and when, however, they don’t have to deal with running a business like a limited company would.
This suits many contractors who want control over their contracting careers, but don’t want to deal with the hassle of setting up and running a limited company. This is also why thousands of contractors choose umbrella vs PAYE, as PAYE agency contractors cannot choose their own contract work.
That’s why many consider an umbrella company as the perfect medium between a limited company and PAYE agency.
