Moving from Ltd to Umbrella, what do you need to consider?

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.

Spotlight 55: When the umbrella company you work with is not a “compliant” umbrella. HMRC provide further warnings…

HMRC warn that comparison websites or brokers marketing umbrella companies are not always what they seem and urges contractors to do their due diligence.

With only a delay announced to the IR35 reform, it seems that there has (as predicted) been a hike in umbrella companies.  On 27th April , HMRC issued a new Spotlight urging contractors to take independent advice before working with an umbrella company to avoid finding themselves liable for unpaid tax and national insurance.

This new guidance warns that promoters of tax avoidance schemes are using brokers and price comparison websites to attract clients to umbrella companies not abiding by the tax rules. As has been the case for many years, these businesses try to convince contractors with offers of higher take home pay. Sites often mixing compliant and non-compliant providers, the latter sometimes being called ‘advanced’ or ‘enhanced’ umbrella services, which can make them sound like a legitimate PAYE umbrella.

HMRC’s Spotlight 55 publication provides guidance to workers on how to choose an umbrella including some of the warning signs to look out for. Taxpayers are told to be especially careful of arrangements offering higher take home pay involving:

  • annuities;
  • fiduciary receipts;
  • credit facility;
  • shares;
  • capital payments or advances; or
  • bonuses
  • loans

It would seem like common sense but HMRC are advising taxpayers to check whether the umbrella even has a company name, registration number and postal address. I say common sense, as you have to remember you trust these companies to handle your money – you wouldn’t just transfer your savings to any old bank, now would you?

A compliant umbrella company is used to employ a contractor, as an employee for tax purposes, while he or she performs work for an end client. The main function of a brolly is to facilitate payment to their employee, net of PAYE and National Insurance contributions (NIC). In essence, we act as tax collectors for HMRC, so if they don’t get what they expect it can lead to many shall we say issues and if these relate to personal taxes, it is HMRC that will come after you!

The challenge is that while most umbrellas comply with the tax rules for their workers, not all are quite so clean cut and with offers of greater take home pay some contractors can fall into that trap especially in such tough financial times.

Taxpayers are advised to be aware that if their salary is paid through different routes, they may not have paid income tax and NIC on all elements and independent professional advice should be sought. HMRC reminds those tempted that they remain legally responsible for their own tax affairs and for paying the correct amount of tax and NIC.

HMRC also warns taxpayers to be wary of claims, such as: “We only use HMRC compliant umbrella companies that are independently reviewed” and “QC approved”. For not the first time, HMRC highlight that they don’t approve umbrella companies and that it will always challenge tax avoidance arrangements.

Maybe now is the time for HMRC to go back to the announcement from the Taylor Review where they looked to regulate the industry. This was somewhat lacking in the last Finance Act, but maybe the delay to IR35 will give them time to try and provide a little more clarity in the industry and level out that playing field, cut out the self regulation and rid the market of those companies that continue to put contractors at risk of investigation by HMRC.

For further information see HMRC guidance Tax avoidance schemes aimed at contractors and agency workers.

IR35 in the Private Sector is coming… but are you prepared?

IR35 in the Private Sector is coming… but are you prepared?

Private sector firms need to prepare and take their time to understand the complexities of the incoming IR35 tax avoidance reforms or risk losing their contractor talent!

Under the reforms due in April 2020, medium to large private-sector organisations will take responsibility for determining whether the contractors they engage with should be taxed in the same way as salaried employees (inside IR35) or off-payroll workers (outside IR35).

Under the current legislation, it is down to contractors to self-declare how they think they should be taxed.

In April 2017, the IR35 reform in the Public Sector was introduced and in the lead-up to and aftermath to these changes, there were numerous reports of contractors walking out across government departments, and claims that many had had their engagements incorrectly classified.

It is now feared that the same could happen again once the reforms apply to the private sector, unless firms take the time now to get to grips with the rules and their new responsibilities and we are starting to see some of the tell tale signs emerging…

Barclays prepare for IR35 reforms…

According to HMRC’s IR35 guidance, organisations are supposed to assess the tax status of each contractor they engage with on an individual basis, but evidence from the Public Sector Reform suggests that has not always been the case and the announcement by Barclays has come as no real surprise!

A knock on effect of large businesses refusing to engage limited company contractors due to IR35 changes from April 2020 has begun. Morgan Stanley and M&G Investments, Barclays and Lloyds have now all said that they will not enter into contractual agreements with PSC engagements.

IR35 & Working with Clarity Umbrella

For those contractor’s caught in the cross fire, working via an umbrella company may be one of the options they have moving forwards. If you are looking to operate via an umbrella then you need to make sure you understand exactly what you are getting before you accept the assignment.

One of the biggest changes will be that to your take home, if you are not able to negotiate a rate increase, then please do use our online calculator to assess what your take home may be working as an employee of the umbrella.

Photo by JESHOOTS.com from Pexels.

What does an umbrella company do?

So we’ve been asked to explain in simplistic terms what an umbrella company does! So here goes…

Working via an umbrella company is an alternative to operating your own Ltd company. It was deemed an option that required minimum hassle, minimum paperwork and ensured all taxes were paid at source under PAYE.

At Clarity, we run payroll for individuals who are working on a temporary assignment with a client, but wish for their taxes to be taken care of and to work under a contract of employment giving them statutory employment rights.

In April 2020, the way in which end clients engage with contractors is about to change (applicable to medium / large businesses). This is covered under a piece of legislation called IR35. If the end client deems an individual is akin to an employee, then HMRC expects them to be paid as an employee ie paying PAYE taxes, not drawing dividends!

Working via an umbrella company, the brolly is deemed the employer and the end client’s liabilities for tax are negated.

The contractor, should I say employee, is employed under a contract of employment, receives a payslip everytime they are paid, and at the end of the employment they will receive a P45, as per standard employment.

BUT, working via an umbrella company is not exactly the same as normal employment, so you will need to ensure that you know exactly what you are getting before you sign up.

For more information on understanding your take home through an umbrella please click here.