Should concerned contractors switch to an umbrella?
With the IR35 private sector reforms just around the corner, there is concern from contractors about how these changes will impact their working practices. But your contract being deemed inside IR35 by your client doesn’t need to spell the end of self-employment for you. Far from it, in fact.
Instead, an umbrella company could be a good alternative if you’re looking for a new way of working without the worry of IR35, or you want a solution which gives you the same freedoms of contracting through a limited company without the responsibility of directorship.
In this article, we’ll outline how you can switch to an umbrella and why this might be a smart decision.
What might IR35 reform mean for your limited company?
The upcoming private sector reforms are set to mirror the public sector reforms (with an exemption for small businesses) and mean that contractors will no longer be in charge of determining the IR35 status of their assignments. Instead, the responsibility will fall to the end-client.
If your assignments are caught inside IR35, running a limited company may not be the most tax-efficient option for you. This is because your end-client (who will effectively be acting as your employer) will deduct tax and National Insurance on your behalf before you’re paid.
After the public sector reforms, and as a way to mitigate their responsibility, many end-clients have simply applied a blanket approach to contractors and deemed them all inside IR35. There is a fear that this too will become commonplace in the private sector from April 2020. Needless to say, it has raised a number of questions about what the future holds for limited company directors.
Many contractors are understandably asking what they should do with their limited companies. If you’re only looking to work under an umbrella for a short period of time, making your limited company dormant could be the easiest option. When you make your company dormant, your financial responsibilities will be minimal. You will just need to prepare your Annual Accounts and Annual Confirmation Statements. Some contractors are turning to company dormancy as this will allow them to easily continue trading again in the future.
How does operating through an umbrella work?
Working under an umbrella company is simple and there are just a few steps involved…
Sign up with an umbrella company
Once you’ve found an umbrella company, you will sign a contract with them and become an employee of theirs. Your umbrella company will also sign a contract with the recruitment agency.
Submit your timesheets
You will need to submit timesheets to the umbrella company, outlining the number of hours you have worked and any expenses you have incurred. The umbrella company will bill your agency for these hours on your behalf.
You get paid
Your umbrella company will pay your wages directly into your bank account, after deducting tax and National Insurance on your behalf, alongside a margin to cover administration costs. You will also be issued with a payslip.
Looking for an umbrella company?
If you decide to work under an umbrella for a short period of time, Nixon Williams are well-placed to help. Though Parasol, their sister company, they are able to offer a comprehensive umbrella solution. Find out more about what’s involved and what you need to do via their website.