If you have just secured your first contract or are thinking about contracting for the first time, your agent may have spoken to you about IR35 and umbrella companies. You may now be feeling overwhelmed, there is no need, we can walk you through the process and provide advice to make the overall step simple and transparent.
The information we have provided below will help answer some of your questions and increase your confidence in moving towards contracting.
What is IR35?
IR35 is a piece of legislation introduced by the Inland Revenue, in April 2000, designed to stop tax and National Insurance evasion. They believed that a large number of contractors who worked as “one man band” companies were often treated as self-employed but were, for all intents and purposes, employees of the end client. This definition was based on the conditions the contractor worked under.
How does IR35 affect me?
The IR35 status of your contract determines your tax and National Insurance contributions. If it is determined that your contract is inside IR35 then your payments will be subject to income tax, employee’s National Insurance and employer’s National Insurance. You will be able to claim business expenses and they will be processed as a tax benefit i.e. before the deduction of tax.
If your contract is outside IR35 you will be able to draw dividends from your own or a managed Limited Company. Typically you will receive a wage on which income tax and National Insurance contributions are payable. The balance of your earnings paid as dividends will not attract National Insurance deductions, however, corporation tax is payable on the Limited Company’s profits.
What expenses can I claim?
You can only claim those expenses that are permitted by the Inland Revenue. These must be costs that you personally have incurred and they must be wholly caused by and entirely attributable to the contract. You must ensure that any expense you claim is supported by a receipt.
What is an umbrella company?
An umbrella company operates as an alternative to you running your own Limited Company. They are responsible for raising invoices on your behalf and making payment to you when funds are received from your agency/client (less deductions for tax and National Insurance). There should be no difference in the return you receive from one Umbrella company to another, except the fees they charge. As with any service, ensure you thoroughly research the umbrella company before deciding to work with them. There are many specialist contractor sites that will offer advice if you are unable get a personal recommendation. We are more than able, and happy, guide you through the options available.