Following changes for off payroll working in the Public Sector, many contractors may have found themselves assessed as working inside IR35. Many end clients do not want the hassle of deciding each individual case and so have placed a blanket ban on all contractors. Many of these contractors cease operating through their own limited company, and opt instead for umbrella employment as their agency and end client have suggested. For a contractor working inside IR35 this is usually the better choice, but it is a very different way of working. So, what you can expect following your switch to umbrella employment?
Previously:
In the pre-reform world, you billed/invoiced your agency or end client through your limited company. You then paid yourself a combination of salary and dividend, and submitted a self-assessment tax return at the end of the tax year and took advice from your Accountant.
Now you are an umbrella employee:
An umbrella provider now employs you. As your employer, the umbrella company will bill their customer for your work.
No need for a self-assessment tax return:
Unless you receive income from elsewhere, you will not need to complete a self-assessment tax return at the end of the year. Instead, your pay will be calculated on a PAYE basis. The umbrella company will make any deductions, so the amount paid to you will be your net pay. You can still complete a P87 form at the end of the Tax year to claim certain expenses, whether you complete a Self-Assessment or not.
Tax (PAYE) and National Insurance:
As an employee, all your pay is treated as salary under the PAYE regime. As a result, it is likely that you will see an increase in the amount of tax and national insurance you pay. This would also be the case if you opted to keep trading via your own limited company if your contract was deemed inside IR35.
How umbrella payroll works:
You become our employee, with a view to doing a succession of assignments. This will allow the location of each assignment to be treated by HMRC as a qualifying temporary workplace, provided you do not expect to work there for longer than 2 years. This in turn will allow us to process your expenses in relation to travel to and from work, free of tax, out of the income you have generated for your department under Fixed Expense provision and in line with SDC. You do the work and the agency or end client pays us a rate, the contract rate, to cover both payment to you for the work you have done and all the costs related to your employment, such as employer’s NIC and the employer’s pensions auto-enrolment contribution. This rate is therefore higher than you would expect to get if you were paid PAYE, to allow for these additional costs. At this stage, the money we receive represents the gross income of the department of the umbrella company that you represent. It has not yet become your money.
The umbrella provider will make provision for your basic pay at National Minimum Wage, a provision for the Employer’s National Insurance, apprenticeship levy and pensions auto-enrolment contributions relating to all payments that are to be made to you. We set aside provision for your working time directive and we set aside provision to reimburse you. What is left represents the profit of your department.
Your basic pay, any loans we may make in respect of your working time directive together add up to your total taxable pay and are shown as such on your payslip. This is paid, subject to PAYE and Employee’s National Insurance, Tax and pensions auto-enrolment contributions.
The umbrella company receives assignment income paid by the agency for the work undertaken. The umbrella must cover employment costs, which includes employers’ national insurance, apprenticeship levy, holiday pay, and pension contributions. These employment costs are deducted from the assignment income. Umbrellas also retain a small margin to cover their costs for the services they provide. This is also deducted from the assignment income.
The remaining amount is your gross pay. You will pay PAYE Tax and Employee National Insurance on this amount. For full details of how this is calculated, please refer to our Guide to UK taxation.
Advantages to being an umbrella employee:
The other side of the coin is that you now have all the benefits, rights and protections afforded to employees by UK law. These include statutory sick pay, paternity/maternity pay and access to a workplace pension scheme. Umbrella employment also gives you one continuous employment across all your assignments, which can be useful if you need a mortgage. You will also benefit from utilising a primary tax code which will result in a huge saving for multiple assignments through more than one agency. More so if you are working on an agencies in-house PAYE, you should seriously consider an umbrella provider to prevent and Basic Rate Tax being applied.
You can access our Childcare Voucher scheme and other benefits, please contact us for further information.
Receiving your salary:
Typically, the agency or end client would pay your PSC on a monthly basis. In most cases, agencies pay umbrella contractors weekly in arrears. However, many agencies run their payroll on a weekly, fortnightly and monthly basis and they will normally advise on the pay cycle upon registration with them and advise you how and when to submit your timesheets to them for approval.
If you have any questions about umbrella, outsourced payroll or how you can register with ePayMe, please contact our expert team on 01252 863 700 or email admin@epayme.co.uk.