Why it is important to understand your tax code when working with an umbrella company.

First of all understanding your tax code and making sure you are on the correct one is your responsibility. Your umbrella company should be there to offer advice, but they cannot change this for you, only HMRC can make the adjustments for you.

We are seeing plenty of contractors who have operated via their own Ltd company and then undertake an inside IR35 assignment via an umbrella company end up on a dual employment tax code (usually a BR code), this applies 20% tax across all earnings and for most of our contractors to be 20% tax payers their day rate would need to be around £230.00 per day, and this would also imply they would not be taking PAYE earnings from their Ltd company and thus no dual employment would apply.

If however your earnings via the umbrella are taking you into the 40% category and you remain on the BR code, then you are likely to be in for a shock when you end up with a tax bill at the end of the year!

If you see a dual employment code, then we would always urge you to contact HMRC and if it is your Ltd company showing and you are not taking PAYE income, then ask them to remove the PAYE employment for the course of the umbrella assignment. This should then put you on an applicable tax code. You can still continue to draw dividends from your Ltd company but remove the PAYE employment.

Crossing the tax year, we have also seen those Ltd companies which were on hold reappear as PAYE income, and dual employment tax codes be issued once again!

On another note, any contractor on around £500.00 per day plus, if working the full year and not paying into the pension scheme, is unlikely to be on a standard 1257L tax code, as their predicted earnings will be in excess of £100k, and anything between £100 and £125k then the personal tax free allowance will drop (obviously if the assignment doesn’t go on for 12 months then this may not be the case and at this point you may like to update the annualised earnings on your personal tax account). Earnings over £125k and your tax code should be a 0T, giving no entitlement to any tax free allowance. If you go through the year with a tax free allowance and pip that figure, then again they may adjust your tax code to claw that back in the latter part of the year.

So our advice, please do keep an eye on your tax account online and make sure the employment details are correct.

So let’s explain a little bit about some of the tax codes:

1257L – this is the standard tax code for 2024/2025 and indicates that there is £12,570 for the year before taxes are due (please note this is done using thresholds on a weekly / monthly basis, not once the threshold for the year is reached). In contractor terms if your day rate is around the £500.00 mark, then if working 12 months then this code is likely to be incorrect.

BR – this means that all of your income will be charged at 20% with no tax free allowance. This may be down to HMRC viewing you as having dual employment and that all of your tax free allowance has been used elsewhere. We would always encourage people to check this tax code as it does indicate another PAYE employment (which could include pension) sat on your personal tax account. If left, and you are in fact a 40% tax payer, this could lead to a tax bill later in the year.

D0 – this means that all of your income will be taxed at 40% with no tax free allowance. Again potentially a dual employment tax code, suggesting PAYE income elsewhere of over £50k.

SD0 – this means that all of your income will be taxed at 21% with no tax free allowance.

D1 – this means that all of your income will be taxed at 45% with no tax free allowance. Again potentially a dual employment tax code, suggesting PAYE income elsewhere of over £150k.

0T – this indicates that HMRC are predicting your earnings over £125k and removing any tax free allowance, as such 20 and 40% taxes will commence from the first penny of your earnings.

K Code – this indicates that HMRC believe you owe taxes and the figure after the K indicates the amount they are looking to claw back from you for some reason (eg K123, means a figure of £1,230 on which extra taxes are due).

T Code – this indicates that HMRC are potentially reviewing your code and this may be amended at another point. Quite common for a contractor who earnings alter from month to month.

X – if you have an X at the end of the tax code, this means that your tax will only be calculated on the payment being processed; it does not take into account the tax you have already paid / or not paid in previous periods. This is likely to remove any year to date earnings, so if you think this is incorrect you must contact HMRC to discuss what impact this may have on your personal tax liabilities.

C – if you have a Welsh tax code, and S – if you have a Scottish tax code.

As for Scottish tax codes, well this is a whole other ball game, so if you need to take a look, please visit HMRC here.

In short, do look at your payslips and make sure that your personal tax code is correct, if you are not sure, pick up the phone and ask HMRC as they will have access to everything in relation to your personal taxes. Alternatively do take a look at your personal tax account online as this may help explain.

On a final note, keep an eye on your personal tax account to see what HMRC have your predicted annualised earnings down as for each employment, if you don’t think this is going to be correct then maybe look to amend it, or speak with HMRC to confirm what is right for you.

Taxpayers whose only income is taxed under PAYE, and who earn between £100,000 and £150,000, will be removed from self-assessment from tax year 2023/24 onwards.

In May’s Agent Update, HMRC reported that the self-assessment threshold for taxpayers taxed through PAYE will be changing with a rise from the previous £100,000 to £150,000 from tax year 2023/24. 

The self-assessment threshold for PAYE taxpayers for 2022 to 2023 remained unchanged at £100,000. However, HMRC has said that once taxpayers submit their 2022 to 2023 tax return, they will be assessed against the new £150,000 criteria and if their 2022/23 tax return shows income between £100,000 and £150,000 that is taxed through PAYE, and they have no other substantive sources of income, they will receive a SA251 exit letter. 

If you are working via an umbrella company, please remember your assignment rate is not your PAYE earnings or taxable salary needed for the assessment, this is the figure after employment costs; Employers National Insurance, Apprenticeship Levy and the umbrella margin.

If you are unsure of your PAYE earnings this should be listed on your payslip with year-to-date figures. Otherwise, as you cross the end of the tax year (April 5^th), a P60 should be issued with all the details you need to keep an eye out for.

However, taxpayers will still need to submit a tax return for 2023/24 if they’re in receipt of any untaxed income, are a partner in a business partnership, need to pay the High-Income Child Benefit Charge (HICBC) or if they’re self-employed with a gross income over £1,000. 

HMRC stated that “It does not reduce or change the tax liability of those affected. Income tax will continue to be collected through the PAYE system.” The tax department also added that any taxpayers will still need to file a return if they have other untaxed income that cannot be coded out and taxed via PAYE.

HMRC issue statement on conditions where the intermediary is a company for IR35.

Over the last few weeks, you may have seen the information that we have posted on the “hiccup” with the drafting of the IR35 Reform Legislation and the Guidance issued by HMRC. Well it appears that HMRC have sat up and listened.

In conversations, they noted that the interpretation of the changes had caused unnecessary issues which placed umbrella companies as an intermediary for the purposes of the legislation, leaving the burden of taking all tax and NI deductions to the recruitment agencies. HMRC have now confirmed that it was not their intention to catch umbrella companies in this way and have provided the following official statement after a meeting between stakeholders and HMRC officials on Wednesday, 14 October.

The statement reads as follows: “Off-payroll working from 6 April 2021 – interpretation of section 61O and the conditions where the intermediary is a company”.

Many will argue that this is simply HMRC’s guidance on the matter, however this does not amend the legislation at this time. It is expected that, in time, the amends will be made which will keep the umbrella company away from the definition of an intermediary for the purposes of the legislation.

We will watch this space, but for now it does provide some comfort to umbrella companies and to those agencies who would have found themselves in quite a predicament come April 2021.

The Contracting Awards 2020 Finalist

The Contracting Awards recognise the top contractor suppliers in the UK, and Clarity Umbrella are so pleased to announce that we have been shortlisted as one the Best Umbrella Companies under 1,499 clients.

The category looks for the best Umbrella Companies supporting the contractor market and they are asked that they are able to show excellence in customer service, show their commitment to compliance and demonstrate what they do to provide excellent customer service and added value for their customer.

To achieve this Finalist status is something that we, here at Clarity, are incredibly proud of, especially as we have only just come to the end of our first full year in business and we are competing against competitors who have been in business for many years.

We will continue to ensure that we invest our time and effort into customer service and compliance as well as ensuring we are always on hand to offer best advice to contractors and suppliers throughout the supply chain.

We look forward to seeing what the next year has on offer for us.

The virtual awards event celebrates the best service providers to contractors the UK has to offer. The awards event will be held at 4pm on 4th November 2020.

Day Rate and Take Home Pay

So you may have been told that your assignment is now inside IR35, or that you are required to use an umbrella company. If this is the case then you need to make sure that you are looking to achieve the right contract rate for your assignment, one that you are comfortable with.

Working via an umbrella company you need to be aware of the deductions that are taken from the monies received by the umbrella before your taxable salary is calculated (ie the value used to calculate your Employee’s NI and PAYE tax).

Detailed below is a snapshot of a range of day rates and the anticipated take home that you should expect if you are working via an umbrella. Please note we have to make certain assumptions when producing these illustrations.

Take Home Pay Breakdown from £100 per day to £1,000 per day

Assumptions:
This includes a standard 1250L tax code on a week 1 basis – this means that we will only take into account a single tax free allowance for this period. We never include any allowance for any expenses for tax relief purposes, and there is no pension included (with Clarity Umbrella you will be auto-enrolled into the our pension scheme 3 months after your assignment start date). We do not look to include any student loan calculations either.

If you do require a bespoke calculation, then please feel free to complete our Bespoke Calculation form and we will be more than happy to provide you with an illustration.

Image by Gerd Altmann from Pixabay

We are aware of two options that businesses are currently considering but are there really any work arounds? In reality probably not!

We know what HMRC are looking to achieve, so could these options leave contractors and recruiters at risk?

Consultancy Work

Consultancy work is where the business acting as the consultancy will take responsibility for the delivery and quality of the services, this may involve taking on a larger project and sourcing expert contractors to deliver the work.

This will require the consultancy to provide increased insurance coverage and a consultancy model is particularly risky if there are no internal expertise on the type of service they are providing – at which point a project manager my need to be hired.

When used appropriately, this type of contract falls out of scope of the public sector off-payroll working rules.

From April 2020, if you are operating as a consultancy providing an outsourced service to your end-clients, for the purposes of the off-payroll working rules, you will be deemed as the client and therefore responsible for making the status determination statement.

Statement of Work (SOW)

The second option is a Statement of Work (SoW) or outcome-based contract.

If appropriately executed, it is likely to be “outside IR35” compared with the traditional time-based contact on a set hourly or day rate.

It may be possible for the client to have a direct contractual right to sue the contractor for poor services or failure to deliver meaning a recruiters risk is reduced (although clients may often prefer the security of pursuing the recruiter).

Furthermore, it is more likely that an assignment will fall “outside IR35” if the performance of the services carries a genuine business risk, e.g. payment is conditional upon acceptance of services or satisfactory performance, and rectification of defects or poor performance are made at the contractor’s cost.

Although this may seem like an easy option to adapt to the new rules, a recruiter will remain at risk if the reality of the contractual performance does not reflect the contractual wording.

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In reality any work around for the new IR35 rules is likely to upset HMRC, and could lead to a crack down later on down the line.

Image by Arek Socha from Pixabay

Assignments “Inside IR35”

So we are all seeing posts about who is liable to employment payments, whether uplifts need to be provided or whether contract rates are deemed acceptable to provide to the contractor.

Well if the client determines that an assignment is “inside IR35”, you need to understand what options are available in terms of an alternative to an off-payroll model.

The options are:

PAYE payroll (agency workers)
Where a recruitment business contracts directly with the worker and operates tax and NICs under agency rules and provides the workers with worker rights – the off-payroll working rules DO NOT apply.

Pay rate should be quoted as TAXABLE SALARY.

Umbrella Company
Where an umbrella company employs the worker directly, the off-payroll working rules DO NOT apply.

Pay rate should be quoted as CONTRACT RATE.

“Inside IR35” PSC
Should you wish to continue to engage as a contractor via your PSC who is deemed “inside IR35”, your recruiter will need to calculate a “deemed employment payment” using the RTI (Real Time Information) payroll system. The deemed employment pay rate is the income of the worker after deductions, including both employee and employer NICs and the Apprenticeship Levy. Neither worker rights nor stakeholder pension rights apply. No expenses allowance applies. The off-payroll working rules DO apply.

Pay rate should be quoted as TAXABLE SALARY.

Image by Gerd Altmann from Pixabay