Umbrella companies are a hassle free way of receiving payments and its quite the talk of the town these days because of the off-payroll rules in the public sector (soon to be rolled out in the private sector, April-2020); that puts most workers under IR35, restricting them to operate as a limited company.
But first, let’s clear the concept on what is an Umbrella company?
An umbrella company employs freelancers and contractors through recruitment agencies. The recruitment company will engage with Umbrella Company directly. The contractor will temporarily become employee of an umbrella company and will be paid on PAYE basis. An umbrella company takes care of the necessary Tax & NI calculations & payments. This is a hassle free way of receiving payments & ideal for someone just starting out on contracting journey or under an inside IR35 contract. The contractor also has access to many benefits offered by the umbrella company.
A vital point to remember is that all umbrella companies operate under the same rules and regulations which means there are no shortcuts, elaborate schemes and creative accounting. The expenses claims may only include items or services which are allowed by the regulations imposed by HMRC. This means that contractors can take home most of their pay as a standard employee would, minus the fee they have to pay the umbrella company for dealing with the admin.
How does an Umbrella Company Works?
Paying tax is a legal requirement for everyone, including contractors. Umbrella companies are required to make deductions under PAYE for Income Tax, Employee and Employers National Insurance and Pension Contributions (where opted for). PAYE calculations are determined by HMRC with both the tax and national insurance being deducted as a percentage of earnings.
What is a Personal Tax Account?
To verify if the umbrella company is remitting the correct tax to HMRC on your behalf we encourage all contractors to create a Personal tax Account. The Personal Tax Account system is a new online resource HMRC has launched to enable you to view and make changes to your information online. It is intended that you will be able to manage your tax affairs through the account rather than calling or writing to HMRC.
The personal account can be used for:
- Checking the income tax estimate and tax code
- Your weekly/monthly pay in HMRC records
- Filling in, sending and viewing the personal tax return
- Claiming tax refunds
- Checking and managing the tax credits
- Checking the State pension
- Tracking tax forms that have already been submitted online
- Checking or updating the Marriage allowance
- Informing HMRC about a change of address
- Checking or updating benefits from work
- Finding the National Insurance number
Note: You can create your Personal Tax Account here:
Everyone gets a tax code which will determine their tax-free pay as well as their income tax amount. For example, the 1250L tax code for the 2019/20 tax year means that the employee will not be taxed on any income below the 12,500 pounds which is the current personal allowance. After the personal allowance is taken into account, the next 37,500 of income is taxed at 20% which is the basic rate. So, the higher tax rate is only paid if an employee earns more than 50,000.
Before you get started, you’ll need a few things to hand:
- Your National Insurance number. Either a recent pay slip, a valid UK Passport or your most recent P60.
- Access to either the HMRC website or the official smartphone app.
- Access to a mobile, landline to receive your security code via text, app or over the landline.
Some of the tax implications of umbrella companies are:
- It is possible for contractors using an umbrella company to off-set some of their tax liabilities by claiming for legitimate business expenses by submitting a P87 form or a tax return at the end of the year.
- The better umbrella companies have a team of expert tax advisors on hand to ensure their contractors know exactly what expenses can be claimed and so take-home pay is allowed to the maximum by HMRC.
- Completing HMRC tax forms and keeping detailed records of business activity can be made less stressful by availing the services of an umbrella company.
If you’re looking to join an umbrella company, simply give us a call on 020 3500 2615 or mail firstname.lastname@example.org. Our expert business team will get back to you on all your queries.
Visit https://www.reliasys.co.uk/ for more information.