When it comes to choosing a payroll solution, contractors have two main options, a limited company or an umbrella company. While both have pros and cons, changes to the off-payroll rules mean that contractors need to carefully consider which structure is the most suited to their contract.
One of the primary benefits of contracting through a limited company is that the contractor can pay themselves though a combination of low salary and high dividends, which results in a tax saving of around 20-25%. However, changes to off-payroll working that came into the public sector in 2017 will also apply in the private sector from April 2020.
After April 2020, in both the public and private sectors, the client will be responsible for determining the IR35 status of a particular contract, while liability for deducting NICs and tax is passed down the supply chain. In the public sector this has already resulted in a large number of contractors being assessed as ‘inside’ IR35. If your contract work is subject to IR35 tax legislation, the benefits of contracting via your own limited company are vastly reduced.
At the moment, if a contractor works in both the public and private sectors, it’s likely that they will undertake projects that will be a mix of those caught by IR35 and those which are not. Equally, when IR35 reforms apply to the private sector in 2020, contractors might find that some of their assignments are deemed inside IR35 by the client, while some are assessed as outside.
If the contract falls ‘inside’ IR35, it may be worth attempting to renegotiate the terms with the client. However, if this isn’t possible, then another option is to join an umbrella company. By joining a PAYE umbrella company, you will become their employee. This means that the umbrella will take on employer’s liability for deducting tax and NICs, and IR35 will not apply. Although an umbrella isn’t as tax efficient as a limited company structure, contractors don’t have any of the administrative duties of running a limited company and are also entitled to employment benefits.
Contractor should also keep in mind that they can move between the two payment structures as long as they keep their agency informed. By keeping their limited company open, contractors can continue to trade through it and benefit from drawing dividends on the non-IR35 caught assignments. If they also work on contracts that are inside IR35, they can transfer to a limited company while placing the limited company into a ‘dormant’ state.
Organisations will inevitably take a period of time to adjust to the reforms and their new responsibilities; keeping both payroll options open will give the contractor maximum flexibility to accept the contracts that they want to work. An accountant who specialises in contractor affairs will also be able to reduce much of the administrative burden of running a limited company, while an IR35 advisor can offer guidance if the contractor is in disagreement with the client’s assessment.
Contractors should keep themselves informed on how IR35 will affect off-payroll working and prepare themselves for the changes ahead. For an overview of the changes to date, you can download our IR35 guide here.
Umbrella Exchange offer information on a wide range of contracting services, to speak to a member of our team call: 0203 393 3881