The IR35 Reform hits and you need to change from your Ltd Company to work via an umbrella company, what do you need to consider?

In April 2021, we expect to see the IR35 reform in the private sector, and as we head closer to that deadline many end clients are back to reviewing their decisions. So if you’ve been operating via your own Ltd company and are now being asked to operate via an umbrella company what do you need to consider?

When you register with an umbrella company, you will be asked to provide a P45 or Starter Checklist in order for them to set you up on the system, but what are the implications of using each one?

If you don’t have a P45 from your Ltd company then the starter checklist will (assuming you pick Statement B i.e. have worked this tax year, but have no other PAYE earnings) place you on a 1250L W1/M1 tax code, this allocates one tax free allowance for the pay period. 

All this means is that once the first payroll is processed and reported via RTI, then you will more than likely receive a coding notice to amend your tax code. The problem is that HMRC are likely to think you have two PAYE incomes; one from the umbrella and one from your Ltd company. They will then determine where any tax free allowance lies, more than likely leaving this on your Ltd company and no tax free allowance with the umbrella. So you may be in a situation whereby you have to speak with HMRC and ask them to allocate all the tax free allowance to your umbrella employment, assuming no PAYE income from the Ltd company.

So the ideal situation is that you get your accountant to P45 you off the Ltd company, this should then allocate tax free earnings to the new umbrella employment. It may also mean you end up with little or no tax taken in the first pay-packet, assuming you’ve drawn little PAYE earnings from the Ltd company. This would also be dependent on what point in the year the transition happens.

You may also need to consider your annualised earnings… When the umbrella earnings are reported to HMRC, they will take your earnings for the period and assume you will be earning that amount throughout the remainder of the financial year. With many high earners, this could place you in the high earner category and could see any tax free allowance removed. For many contractors, we know that there can be some time spent on the bench, so the anticipated annual earnings may not be as high as predicted by HMRC. If this is the case, then may be able to log into your own personal tax account and see what assumptions HMRC are making and, if needs be, you may be able to amend this.

At the end of the umbrella employment, if you still have the Ltd company, make sure you get your P45 and pass this back to your accountant, so they can update your tax affairs ready for inclusion as employed PAYE income on your self assessment tax return.

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