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What Are Your Options if you’re Inside IR35?

IR35

From April 2021, your client will be responsible for determining your IR35 status, unless they class as a small private company. We’ve already covered best practice and how to give yourself the best chance of being found to be outside IR35, but what if you’re found to be inside, and there’s no way to change your status? In this article, we’ll look at the options available to contractors who are working inside IR35.

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Understanding why you’ve been found to be inside IR35

By making an inside IR35 determination, the client are stating that their relationship with you resembles employment, rather than a business to business relationship. When they inform you of the results of their status determination, they should also provide reasons why they’ve come to that conclusion.

Depending on their reasons and your relationship with them, it’s possible you might be able to adjust they way you work and request another assessment. Most well-informed clients will have some sympathy with this idea because it’s also better for them if you can safely work outside IR35. However, even if you can’t change the result for this contract, it’s important to understand why you were found to be inside, so you can give yourself the best chance of being outside for future contracts.

The consequences of being found to be inside IR35

If you’re inside IR35, PAYE tax and National Insurance Contributions (NICs) must be deducted from any payments made to your limited company. If you continue to trade through your limited company, this responsibility falls on the Fee Payer, which is whoever pays your company. The Fee Payer must also pay employer’s NICs.

This can have a significant effect on your take home pay, as you won’t have the opportunity to split your income between salary and dividends.

This also represents additional work for the Fee Payer, who is usually your recruitment agency. The availability of the “fee payer option” will depend on their ability and willingness to make the necessary calculations. Many will ask you to choose a PAYE solution, like umbrella employment or agency PAYE, instead.

In any case, the fee payer option is not usually the best option for you, as it leaves you funding your limited company effectively from taxed income.

Agency PAYE

Again, if your agency is willing and able you may have the option to be paid directly by them rather than receiving payments to your limited company. The agency will deduct PAYE tax and NICs through their own payroll system. Umbrella company employment has some important advantages over agency PAYE, and as a result we’d usually only recommend this option to short term contractors.

Umbrella company employment

If you decide to move from your limited company to a PAYE solution, umbrella company employment is usually the best one to choose. The agency will have a contract with the umbrella company, much like they did with your limited company while you were outside IR35.

You’ll be employed by the umbrella for as long as you’re with them, rather than having a new engagement for each assignment, and you’ll have full employment rights while you’re employed. These will include paid holiday, sick pay, maternity/paternity pay, and access to a workplace pension that the umbrella company also pays into. Depending on the umbrella company, you may also receive additional benefits.

The main difference with umbrella employment is that you’ll be an employee of the umbrella, rather than a director and shareholder of your limited company. Most contractors making the switch will have some adjustments to make as a result of this.

The effect on your income

Whichever option you use, the effect on your income will be roughly the same. Assuming you were outside IR35 before, and your contract rate remains the same, you can expect to take home less money as a result of being found inside IR35.

Depending on your bargaining position, and your relationship with the client, you may be able to request an uplift to the rate, to offset this.

Improving your position for future contracts

Your IR35 status needs to be determined each time you start a new contract, which means being inside IR35 for this contract does not mean you will always be inside. In order to give yourself the best possible chance of being found outside IR35 in future contracts, you should follow best practice to ensure your relationship with your clients is a business to business relationship, and does not resemble employment. Our Guide to Demonstrating You’re Outside IR35 has more information on how to achieve this.

If you have any questions or if we can help in any way, please call our expert team on 01296 468483 or email info@orangegenie.com.

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