Does IR35 apply when working for an umbrella company?

Unsure if IR35 rules impact how an umbrella company operates?

To ensure you stay on the right side of the tax law in the UK, it’s important to understand how umbrella companies and IR35 exist independently of each other.

Regardless of whether you’re a well-versed freelancer that’s already familiar with both IR35 and umbrella companies, or if you’re new to this way of working and have never come across these terms before now, this explainer answers the most commonly-asked questions.

What is IR35?

IR35 (Inland Revenue 35) is a UK tax term used to describe the legislation built around off-payroll working rules.

These were introduced to prevent contractors from ‘disguising’ themselves as self-employed and thereby receiving an unfair tax advantage.

A ‘disguised employee’ typically refers to an individual that fulfils the same role as an employee, but is hired as a contractor and operates through their own limited company.

In this scenario, the contractor and the client can save money if the former is classed as ‘self-employed’ for tax purposes.

While the contractor benefits from a more generous tax rate, the end-client doesn’t have to pay for employers’ NICs (National Insurance Contributions), insurance, or any other administrative costs of hiring an employee.

IR35 rules were devised to ensure contractors don’t have an unfair advantage by taxing them at a similar rate to regular employed workers if they don’t meet HMRC’s definition of ‘self-employed’.

Does IR35 apply to your contract?

If you’re working for an umbrella company, then IR35 won’t apply to your contract.

This is because you’ll be an employee of an umbrella company, meaning your earnings are subject to PAYE (Pay As You Earn) and NICs.

By making the necessary deductions on your behalf, umbrella companies provide a stress-free solution for contractors, removing any uncertainty regarding unpaid taxes.

You should only be concerned about IR35 if you’re a self-employed contractor.

What does IR35 mean for an umbrella company?

As outlined above, IR35 rules are aimed at self-employed contractors to help them determine if they’re operating ‘within IR35’.

For that reason, IR35 doesn’t have any impact on how an umbrella company operates.

How do umbrella companies avoid IR35?

Given IR35 doesn’t apply to individuals employed by an umbrella company, these companies don’t actively ‘avoid’ IR35; instead, these rules just aren’t applicable.

By working as an employee of an umbrella company, you’ll naturally avoid the stress of ensuring you’re abiding by IR35 rules and having to accurately completing self-assessments due to your employment status.

Can you be ‘outside IR35’ and still be paid by an umbrella company?

While you can be ‘outside IR35’ and still be paid by an umbrella company, high-earning contractors are likely to miss out on significant tax advantages in this scenario.

If you’re operating outside of IR35, forming your own limited company would be the most tax-efficient route.

Reach out to Umbrella Tracker today!

Still feeling confused by the benefits of an umbrella company and IR35 rules?

To help you make the right decision when it comes to picking the most suitable payroll solution and umbrella company for your career, turn to Umbrella Tracker.

Regardless of whether you work in the IT or healthcare industry, our team of expert advisors – combined with our comprehensive umbrella company comparison service – explore hundreds of fully vetted payroll providers on your behalf.

Each one of these umbrella companies and limited company accountants has been chosen following in-depth research by our diligent team, as well as the review of current client testimonials and Preferred Supplier Lists (PSLs) from recruitment companies.

If you want to receive free and unbiased advice, as well as save hard-earned time and money choosing an umbrella company that meets your list of requirements, it pays to contact the professionals.

If you want to find out more about IR35 and umbrella company requirements or have a question about the services provided at Umbrella Tracker, don’t hesitate to speak to one of our experienced advisors today.

Alongside completing our online enquiry form, you can also get in touch by simply giving us a call on 0203 026 3303.

However you decide to reach out and explore your payroll solution options, we hope to hear from you soon!