It has now been 10 months since the public sector reform and we are still asked frequently by public sector contractors if they should continue using their own limited company or switch to an umbrella. The answer very much depends on each individual’s circumstances thus we would strongly encourage contractors to speak to us for tailored advice. Nonetheless, we have summarised some of the more common queries below.
Contracting in the Public Sector when using an umbrella company
The umbrella company will be acting as your employer. Your agency will pay the gross amount of your contract revenue to the umbrella, who will then run a PAYE payroll on your taxable income after deducting employment costs including employer’s NIC, Apprentice Levy and their margin. The money you receive from an umbrella company is your net income and no further income tax should be due.
Does my IR35 status matter when working through an umbrella company?
Put simply, no it doesn’t matter. Where the umbrella company employs you, they will make full PAYE deduction on your entire income regardless of your IR35 status.
Can I claim expenses via your umbrella?
If your agency/end client has deemed you inside of IR35 for your contract then it is likely you will also be under supervision, direction or control (SDC). Consequently, you are not eligible to claim travel and subsistence via an umbrella.
My agency insists that I can only be paid via an umbrella company. Can the umbrella company pay the gross income into my limited company?
No. Your umbrella company will have no contact with your limited company and can only make payments into your personal bank account.
Please note, as mentioned above, that as your umbrella company is acting as your employer they must deduct PAYE, NIC and other appropriate employment costs before paying the net amount to you as an individual.
Contracting in the Public Sector with your own limited company
It is your employer’s responsibility to determine your IR35 status. Therefore your role’s IR35 status is normally resolved before you sign the contract. If you are outside of IR35, you can continue trading as if you were in the private sector. If the contract is deemed inside of IR35, the end client or your agency must deduct PAYE, NIC and where applicable, Apprentice Levy before paying the net amount into your limited company’s account.
Can I claim travel and subsistence if I use a limited company?
Not anymore. If you are deemed inside of IR35, travel and subsistence are no longer allowable expenses.
My agency pays the net amount to my limited company, does that mean all the money I received into the company bank account is now my personal money?
If your company is registered for VAT or your total income is above the basic tax rate band, then you should contact your accountant to ensure that a sufficient amount of money has been set aside to settle VAT liability. In addition, if your agency was pay rolling you under a ‘BR’ (basic rate) tax code, then you may be subject to additional income tax under the higher tax rate band. This is because the fund your agency transferred to your company’s account will have included VAT but might not have made suitable deductions when they were running your payroll at a basic rate.
If I am a higher rate taxpayer and have been payrolled under a ‘BR’ tax code, how and when do I need to settle the shortfall?
You will need to pay the shortfall to HMRC by the 31st January in the following year via your Self-Assessment tax return. Please also be aware of ‘payments on account’ due on the 31st January and 31st July if your Self-Assessment tax bill is over £1000.
Contracting in the Public Sector when working through an agency payroll
Some agencies offer PAYE payroll to their public sector contractors, which could be the most straightforward option. Similar to an umbrella company, your entire income is subject to PAYE tax and NI deduction. As your agency does not have to pay the employment cost to an umbrella, the PAYE payroll rate is typically lower than the umbrella rate. It is possible to compare which of these solutions is more viable for you, so ask your agency to supply both a PAYE rate and LTD/Contract rate and your umbrella company can determine the better option for you.
If you work through multiple agencies, it’s important to remember that not all have the capacity to process payroll. Equally, you may find that being paid directly through each individual agency is too much hassle. This is why full employment with an umbrella company could be a better option for you, as they can provide efficiency and ease when managing your timesheets and invoicing. This, of course, varies on an individual basis.
K&B Accountancy Group and Cloud9 Umbrella are offering free initial consultations to assist clients in making informed decisions with public sector contracting. Avoid potential pitfalls and nasty surprises by contacting us today.