Self Assesment and working via an Umbrella Company

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.

Our MD, Lucy Smith wins EADT Business Person of the Year

A message from our MD on the Awards.

“What a way to finish the week!

Last night I had the priviledge of attending the East Anglian Daily Times Business Awards 2025. Finalist for Customer Excellence for Clarity Umbrella Ltd, what an achievement, but such a deserved win for Geek Retreat Ipswich.

Followed by a very unexpected win for me personally (against some outstanding finalists) as I walked away with Business Person of the Year in Suffolk…

What can I say, for the first time in a long time I was truly speechless! Shaking like a leaf and truly shocked! Clarity Umbrella Ltd has been 6 years in the making and in my head it was and is a business set up by little old me in my front room, with the guys from the Contractor UK forum giving me the push I needed. Shy and unconfident as a child, not a high achiever at school, don’t get me wrong I did ok, but someone who had a desire to make the most of every situation, learn and prove a few people wrong.

Last year we payrolled over £62m for our contractors, I guess you can say that is not a bad achievement for that shy, unasuming girl dear teachers!

Last night I was told a few times that maybe it is time to take the recognition for what I have achieved. I am not sure that it has sank in as I sit here this morning, but maybe there is a very humbled smile that has come across my face writing this. Maybe it will only sink in properly when I finally tell my dad!

Rebecca Seeley Harris and I spoke about this only a few weeks ago, about under-estimating our achievements and I think even with an ackolade like this I sometimes struggle to acknowldge where I have got to.

Finally a huge congrats to all of the finalists and winners last night, it was an amazing evening! To Emma Proctor King for taking the time to get to know me and this business and believing in me and to Jon Neal for your kind, kind words.”

Understanding your tax code…

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.

HMRC issue statement on intermediary definition for IR35.

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.

Contractor Rates Causing Confusion

The changes to IR35 are causing no end of questions and contractor rates are causing confusion; but we are faced with similar queries on a day to day basis, so we thought it might be useful to put something in writing for our network in the hope that it helps explain a few things.

The confusion comes in the first place when an agency quotes an assignment as inside IR35 with a rate attached to it. Based on the legislation, an inside IR35 rate means that the quoted figure should be stated as your taxable salary (ie subject to Employees NI and PAYE tax). The legislation is clear in this case that the employment costs cannot be passed onto the individual and will need to be accounted for by the end client (or via the agency).

However, we then see the agencies quoting the rate via umbrella, which in turn looks different (and probably shouldn’t reference IR35). Working via an umbrella company means that you are quoted a Gross Invoice Rate ie the rate that would be charged by the umbrella to the agency, plus VAT. When the funds are received by the umbrella company, the employment costs must be met from this figure (ie the Employers NI, Apprenticeship Levy and the umbrella margin) before reaching your taxable salary, again subject to Employees NI and PAYE tax.

So let’s take a look at a sample figure, quoted as an umbrella rate, based on £750.00 per day for 20 days per month with no pension on a standard 1250L X tax code:

Monthly Income (Gross Invoice Rate): £15,000.00 (£750.00 per day)

Employers NI: £1,710.73

Employment Tax: £65.64

Umbrella Margin: £95.00

Taxable Salary: £13,128.63 (£656.43 per day)

Employees NI: £584.23

PAYE: £4,209.48

Total Net Income: £8,334.91

So, as you can see a quoted umbrella rate of £750.00 per day will give you a taxable salary of £656.43 per day.

There is a lot of criticism surrounding the umbrella market and how it operates, but the model has been in existence for a long time, and believe it or not, it was always an alternative to operating via a Ltd Company until the IR35 reform popped up… and yes some contractor’s did actually opt to work in this manner, we know some find this difficult to believe.

What we would like to say is that when you are looking at a new assignment, take a moment to look at what is actually being offered and make sure that the rate is right for you and your circumstances.

For some umbrella won’t be an option, but for others it will be a requirement, so make sure you know exactly what you’re getting before you sign anything.

If you need any further clarity on this, then do let us know on 01473 845 835.

Lucy Smith, MD | www.clarityumbrella.co.uk

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.

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 27^th 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.

HMRC announces “small” change to the off-payroll working rules

Well today, 7th February 2020, we see a “small” change to the IR35 Legislation which comes into force in just a few weeks time.

The original draft appears to have caused confusion over payments and when the rules should actually apply. Previously any payments made after the April deadline would have seen the rules apply and the appropriate deductions made, even if the work was carried out in March. However, as part of the actual IR35 review, it has been decided that there was not enough clarification on this and has lead to some snap decisions for end client and agencies.

So what exactly has been said?

“The rules, also known as IR35, will now apply only to payments made for services provided on or after 6 April 2020. Previously, the rules would have applied to any payments made on or after 6 April 2020, regardless of when the services were carried out. It means organisations will only need to determine whether the rules apply for contracts they plan to continue beyond 6 April 2020, supporting businesses as they prepare.”

The formal publication of a review into the implementation of changes to the off-payroll working rules is due to conclude in February.

#ir35 #clarityumbrella #contractors

For more information, please click on the link below:

https://www.gov.uk/government/news/hmrc-announces-change-to-the-off-payroll-working-rules?utm_source=97e6297a-32de-42b9-a587-16e083a2fe82&utm_medium=email&utm_campaign=govuk-notifications&utm_content=immediate

What Rate Am I Asking For?

Umbrella Rate, Pay Rate, Gross Rate, Contract Rate, Inside Rate, Agency Rate?

Wow, what a confusing topic – or so it seems according to social media!

Following on from many conversations with contractors it would appear that not only are the contractors being left thoroughly confused by the advertised rates but that some recruiters don’t appear to be able to clarify things either. So let’s take a look at what it all means…

1. Umbrella Rate – the figure quoted to you should be the Gross Rate (sometimes referred to as the Contract Rate). This is the figure per day invoiced out to the agency or end client, when the umbrella receives these funds the employment costs must be met from this figure before the employment income (or taxable salary) is reached. If we apply logic, the umbrella will take their margin from the gross rate along with the employment costs, there are no funds coming from elsewhere, this is the monies received from which employment costs must be met. The umbrella margin is not going to be enough to cover these costs. IR35 doesn’t apply in this scenario as you are deemed an employee of the umbrella.

2. Agency Rate – this “should” be quoted as the employment income (taxable salary) and would then only be subject to Employees NI and PAYE tax. We would normally expect to see a lower rate offered for Agency PAYE over umbrella, with the uplift accounting for the employment costs.

3. Inside IR35 Rate – and this is where the confusion lies! As has been stated on many occasions on social media, under the proposed IR35 Legislation, the rate must be quoted as “employment income”, net of any hirer’s taxes. The employment costs are not to be included within this rate and must be met by the end hirer or agency closest to the PSC. IR35 applies.

So this begs the question, how do I know what I am being quoted?

On the 6th April 2020, legislation will mean that the agency or end client must provide a KID (Key Information Document) to any contractor prior to any contracts being signed. This should detail the rate and the deductions dependent on which route you are looking to proceed down for your assignment. In the meantime it simply leads to confusion.

If you work via an umbrella company then you are deemed an employee and as such the IR35 legislation does not come into play. So if you are being moved to an umbrella ready for the April changes, they should be quoting you an umbrella rate which will be subject to employment costs, if they are quoting you an inside IR35 rate then feasibly you should be expecting the agency or end client to meet those employment costs.

In reality what seems to have happened is that contractors are being told that their assignment is deemed inside IR35 and they are being pushed down the umbrella, sometimes with no uplift in rate, leaving the rate to swallow the employment costs.

As I have said all along, it is imperative that when you are looking for a new assignment that you ensure you get clarity on what “rate” you are being provided with. If you are being asked to go down the umbrella route, ask for umbrella rate vs inside IR35 rate and see what response you get! My theory is that it will confuse the living daylights out of most!