3. Switch between your Limited company and an umbrella company

The market is changing constantly and before making decisions that could end up costly long term, consider keeping your company open whilst using an umbrella company. So, why would you do that? Consider the following:

• Complete flexibility to work both inside and outside IR35 – please speak to your accountant if you have multiple contracts.
• Complete flexibility in choosing what to do with the funds invested in the company i.e. company dividends.
• By keeping your limited company open, you ensure your eligibility for entrepreneurs’ relief (please note this could be subject to change based on results from the March 2020 budget. Results from this will be posted accordingly).
• Keep full advantage of the flat rate VAT scheme – saving money on tax.
• Claim basic expenses for the running of your limited company – full expenses should be discussed with an accountant.
• By keeping your limited company open with one invoice raised to your company throughout a 12-month period, this (we believe) secures your eligibility of your entrepreneurs’ relief. If you decide to work solely through an umbrella company for the full financial year and not raise any invoices through your limited company, then please speak to your accountant.
• An option to pay into your company pension, based on set criteria.

Our Easy Switch package allows contractors to do just that. Only £110 + VAT per month and offers complete flexibility. Find out more here: Easy Switch package.

4. Contract through an Umbrella company

As a contractor, you are technically an employee of the umbrella company. All tax and NI is deducted, however take home can be lower as tax is already deducted at source (i.e. from the umbrella services) for your services.

Please note, that if by choosing to close your company and solely use Umbrella your entitlement to entrepreneur’s relief may be affected.

5. Contracting through an Agency PAYE vs Umbrella company

The fee payer has decided that the assignment will only allow you to contract inside IR35, but the recruitment agency have offered you two rates, the choice between using an Umbrella company or Agency PAYE. But what is the difference?

Agency Pay As You Earn (PAYE)

This option means you, the contractor, will be employed by the recruitment agency with your salary processed by their own payroll as PAYE.

• It is the quickest and easiest way to start contracting, you deal directly with the recruiter, submit your time sheets and you are good to go.
• Unable to claim any expenses.
• Can pay into a pension.
• The take home pay is likely to be lower than being employed by an umbrella company as it does not factor in employers NI.

Umbrella Company

You ultimately become an employee of that umbrella company. They employ you, the contractor, freelancer or consultant to provide a service and deduct all tax from source before providing your final take home pay.

• Usually offered a higher rate as the umbrella company do not have to incur the costs of employing you i.e. employers NI.
• You are bound by their contract of employment which remains in place regardless if your contract assignment changes.
• Can pay into a pension.
• A margin will be retained (their fees for services of employment) from the agency potentially reducing take home pay.

Both rates and the tax workings should be broken down by your recruiter/agency. From April 2020 this will be listed in a Key Information Document (KID) which all recruiters are legally required to provide to clients. This ensures you have complete transparency on exactly what tax and is being deducted.

These rates are determined by the recruiter and any queries on the calculations should be discussed directly with them.

Which rate should I choose?

There is no right or wrong answer. Whichever finds you more financially beneficial.

6. Close your company and work as a permanent employee

As a permanent employee you will be offered the choice of two contracts:

• Fixed term employment contract – this role will have a required end date i.e. a fixed date that pre-determines when your services will no longer be required.
• Full-time and part-time contracts – these contracts usually have no end date and all tax is accounted for by the employee.

Both options will see the end client factor in all tax and NI before being paid, you may also benefit from employee benefits i.e. sick pay, rewards scheme etc.

Next steps

So those are the choices. Now you make the decision, BUT consider the following before you do:

1. Closing your company and going into liquidation means you will be unable to become director of a company for several years.
2. What if the market settles? In 2017 several contractors were placed inside IR35 by TFL. In doing so they saw a huge loss in workers. They revisited the contracts and their new approach saw contractors working outside IR35.
3. If you are planning to contract through other means, i.e. an umbrella company it may be cheaper and less hassle to make the company dormant.

There is no one size fits all, so every contract and scenario should be evaluated to suit you and your circumstances, not what other peers or friends are doing.

Please remember, if you feel your contract is being unfairly placed inside IR35 then challenge the company/fee payer. You can read more on our advice on approaching this with the end client here and IR35 here:

• IR35 Ultimate Contractor FAQ
• Contractors and Consultants Guide to IR35 Cest Tool
• IR35 Jargon Buster

This article was written in January 2020. All details provided at this time are correct but are subject to change. Please always speak to your accountant or a specialist for further advice.