Moving from Your Own Limited Company to Umbrella Employment

In the wake of the recent reform of off payroll working in the Public sector, many contractors have suddenly found themselves assessed as working inside IR35. Sound advice has led many of these contractors to cease operating through their own limited company, and opt instead for umbrella employment. For a contractor working inside IR35 this is usually the better choice, but it is a very different way of working. Below you’ll find our plain language guide to what you can expect following your switch to umbrella employment.

What happened before:

In the pre-reform world, you billed your agency or end client through your limited company. As a director and shareholder of your 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. This will have given you a great deal of flexibility in how you were paid, and may have allowed you tax and wealth planning opportunities not usually available to employees.

Now you’re an umbrella employee:

You’re now employed by a much larger limited company (the umbrella company) and you’re not a director or a shareholder. As your employer, the umbrella company will bill their customer (the agency or end client) for your work.

No need for a self-assessment tax return:

Unless you receive income from elsewhere, you won’t need to complete a self-assessment tax return at the end of the year. Instead, your pay will be calculated on a PAYE basis. Any deductions will be made by the umbrella company, so the amount paid to you will be your net pay.

Income Tax (PAYE) and National Insurance

As an employee you have no opportunity to receive any dividend income, and all your pay is treated as salary under the PAYE regime. As a result it’s likely that you’ll 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 once your contract was deemed inside IR35.

How umbrella pay is calculated:

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’ll 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.

There are many advantages to being an 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 reference or access to credit or a mortgage.

As an employee of Orange Genie Umbrella you also have access to our childcare voucher scheme, which allows you to sacrifice some of your taxable salary and receive tax free childcare vouchers instead.

Our employees can also access specialist financial planning, mortgage and pension advice through our trusted partner Contractor Financials.

You’ll also enjoy access to a range of other benefits worth over £700 a year through Orange Genie Rewards.

When you get paid:

Typically the agency or end client would pay your PSC on a monthly basis. In most cases agencies pay umbrella companies weekly in arrears, so you’ll probably be paid weekly rather than monthly. If you’re not sure about your pay frequency or pay date you’ll need to check this with your umbrella company.

If you have any questions about umbrella employment or how you can register with Orange Genie Umbrella, please contact our expert team on 01296 468 483 or email info@orangegenie.com.

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