WHAT ARE HMRC’S RULES FOR UMBRELLA WORKING?

WHAT ARE HMRC’S RULES FOR UMBRELLA WORKING?

Jul 17, 2019

Working as a contractor is relatively straight-forward, but you’ve probably already realised that it doesn’t matter if you’re a limited company contractor, an Umbrella worker or a member of the Construction Industry Scheme, there are a number of rules and regulations which you must abide by.

When it comes to Umbrella working in particular, your Umbrella company will take care of a majority of compliance issues so you don’t need to worry. That’s why it’s extremely important to choose a compliant Umbrella company like Crest Plus who will manage your payments properly and compliantly, in line with HMRC’s rules.

Unfortunately, not all Umbrellas are the same, with some less scrupulous providers bending the rules and being less rigorous about compliance with HMRC’s rules. While they may enhance some contractors’ take-home pay, they put people at risk of severe penalties from HMRC.

While you can rely on our team of specialist contractor accountants to take care of all your compliance issues, we thought it worth highlighting and explaining the main issues which you need to be aware of when it comes to Umbrella contracting.

Umbrella company compliance – does it matter?

Yes, definitely!

  • Without a compliant Umbrella, you may not pay the correct amount of tax.

If you don’t work compliantly and get caught by HMRC, you could have to pay the tax you owe on top of hefty penalties. Tax avoidance is a criminal offence so you could face the full force of the law. Before using a non-compliant Umbrella, ask yourself: is it worth it?

  • A non-compliant Umbrella may not allow you to enjoy the employment rights you’re entitled to.

One of the benefits of Umbrella working is that it does entitle you to the same employment rights as a regular employee. Holiday pay, sick pay, access to a pension scheme, a record of continuous employment as well as paternity/maternity/adoption leave and a range of other benefits. If you don’t work with a compliant Umbrella company, you could find that these benefits are not available to you.

Tax and deductions for Umbrella workers

The main compliance issue relating to Umbrella employees relates to the amount of tax you have to pay.

When you compare working as a limited company contractor with Umbrella employment, you’ll see quite a difference in take-home pay. This cannot be avoided. One of the problems is that some Umbrella companies try to make this method of working more appealing to contractors by altering – in a non-compliant way – how they work and handle your pay.

We explored this in detail in our article ‘Umbrella company compliance explained’ article, but here’s a quick re-cap.

  • Often, non-compliant Umbrellas deduct things from your gross pay before they calculate the tax that’s due. That way, you pay a bit of tax, but not enough for the gross pay you’ve received.
  • Commonly, we’ll see non-compliant Umbrella companies tell contractors they will pay a mixture of salary and loan. These are unlikely to be genuine loans and would be subject to challenge from HMRC.

Changes to off-payroll in the private sector

We expect this issue to become increasingly important because of the forthcoming reforms to off-payroll (IR35) rules in the private sector. Because some limited company contractors may find themselves caught by IR35 under the new rules, they may need to look at Umbrella contracting as an alternative. It’s concerning to us that contractors will try to offset the difference in take-home pay by working with a non-compliant Umbrella which will offer a higher rate of take-home pay by trying to work around HMRC’s rules.

What you should do

You can protect yourself by:

  • Making sure you understand Umbrella working

Make sure you are clear on what an Umbrella company is and how it works. Visit our post on How an Umbrella Company Works. Get pay illustrations
Make sure you look at sample pay illustrations so you can see exactly how your pay is being handled. If anything looks odd, you can clarify before you commit. The litmus test is that if your take-home pay adds up to 85% of your gross pay, you are probably paying too little tax.

  • Choose a compliant Umbrella company like Crest Plus

We are fully accredited members of the Freelancer and Contractor Services Association and have served contractors to work compliantly for 20 years. We take care of all your pay and deductions to give you complete peace of mind.

Find out more about our services for Umbrella contractors or get in touch to ask a question or to request detailed pay illustrations.

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