Over the last two decades, the number of people migrating away from full-time employment to the freedom and flexibility of self-employed contracting has skyrocketed. From just 3.3 million people in 2001, there are now almost 5 million contractors working in the UK today, comprising over 15% of the British workforce.
The benefits of such a switch are self-evident. Not only can contractors dispense with their responsibilities to a boss and seek out only clients whom they wish to work with, the potential for independent organisation of their work-life equilibrium is unparalleled. But are there financial benefits to transitioning to self-employment as well? Although complicated and dependent upon a large number of variables, the answer in most cases is a resounding yes.
There are three principal ways in which contractor earnings differ from that of an employee and which make the former a more attractive role than the latter from a financial perspective. Let’s take a look at those three factors in isolation:
For starters, contractors generally earn a higher wage per day than their employed counterparts, since companies will often pay an inflated fee to gain sporadic access to specialised skills.
At the same time, contractor earnings are not supplemented by additional statutory rights such as holiday allowance, sick pay and maternity or paternity leave as an employee’s wages are, along with a whole shedload of other perks and benefits depending upon the job in question. Therefore, it makes perfect sense that a contractor would charge more for their time, since they must cover the risks that self-employment brings.
Secondly, if managed correctly, contractors can manipulate their tax arrangements to pay less to HMRC than an employed individual. Traditionally, this would involve setting up a limited company and paying yourself a modest wage up to the personal allowance (£12,500 for the tax year 2019/20), thus incurring no income tax whatsoever on those earnings. The remaining profits of the company would then be subject to the corporation tax rate of 19% and could either be taken as dividends (typically taxed at 7.5%) or invested back into the company.
There’s even the option to defer those profits until a later tax year to avoid paying the full amount of taxable contributions this time around. Having said all that, the introduction of IR35 legislation has made tax efficiency a more complicated matter for self-employed people – more on that later.
Thirdly, contractors are also capable of claiming expenses on their daily outgoings, whereas employed people are generally not able to do so. This particularly aspect of self-employment must be managed carefully, since HMRC are both vague and strict about what they deem as claimable expenses.
Food, for example, can be claimed – but only if it is eaten on a day which falls outside of the normal working routine of the individual (daily lunches are unlikely to be allowed). Nevertheless, claiming all overheads (such as office space, insurance and equipment) can save significant sums, making contracting even more attractive from a fiscal perspective.
The tax benefits mentioned above had previously made setting up a limited company so beneficial to self-employed people that HMRC began to suspect many workers who were employed in all but name were abusing the system to pay a lower rate of tax, while the companies who contracted them also avoided paying employer’s national insurance contributions (NICs). As a result, IR35 was introduced in 1997 to clamp down on this kind of chicanery.
However, the legislation was amended in 2017 to stipulate that all public sector end clients would now be responsible for determining whether the contractors with whom they worked fell “within” IR35. Fearful of falling afoul of the rules and incurring hefty fines, many clients simply swept all of the contractors they worked with into the IR35 dragnet in a better-safe-than-sorry policy – but this meant that both parties were now forced to pay significantly higher rates of income tax and NICs. Contractor earnings were unsurprisingly hampered as a result.
From April 2020, that legislation is set to be expanded even further to include all private sector contracts, as well. This means that end clients (and by extension, contractors too) will have to go to great lengths to demonstrate to HMRC that IR35 is not applicable to their contracts. Even after investing all of that time and effort, there’s no guarantee that the tax office will view the situation in the same way, meaning 170,000 self-employed contractors could be liable to pay thousands of pounds more in tax and NICs from next year onwards.
Fortunately, there is a way to enjoy the financial advantages of a higher wage and claimable expenses that contracting brings, without any of the tax problems that IR35 can create. By entering into the payroll of an umbrella company, contractors are able to still organise their own working schedules and command higher daily fees than full-time employees, as well as claiming expenses on their overheads. However, since they will become employees in the eyes of HMRC, the need to comply with IR35 will become irrelevant.
Of course, this means that the tax efficiencies mentioned above will disappear, since they’ll be paid according to PAYE rules in the same way that any other employee is – but those benefits are already being significantly diminished by IR35 anyway. What’s more, the umbrella company will also provide all of the supplemental statutory rights that any other employer does.
When the value of those benefits is taken into account, alongside the higher daily rate that contractors can command, it becomes clear that working as a contractor – via an umbrella company – allows Britain’s self-employed community to have their cake and eat it.
If you’re considering taking the plunge and switching to self-employment, it could be a good idea to take shelter from IR35 under an umbrella company. However, it should be remembered that not all firms offer the same services and advantages as each other, which is why doing your due diligence and vetting several options prior to signing on the dotted line is a prudent approach.
Our online comparison tool is the best way to view at a glance which services are offered by which companies and determine who is likely to be the best fit for your unique circumstances. Begin your journey to self-employed satisfaction today!
Any contractor considering switching to an umbrella company will want to know how to find the best provider to work with.
Although you could spend your precious time and energy searching the web for the best umbrella company, there is an easier way – using an umbrella calculator.
In this guide, Umbrella Supermarket explains why every contractor should use an umbrella calculator in 2021.
If you are considering contracting you will need to decide on PAYE or umbrella.
It can be a difficult decision to make and contractors will inevitably be questioning which option will be the best for them.
To help every contractor get on the right track for them, in this guide Umbrella Supermarket looks at PAYE vs umbrella, outlining the key differences and how this will impact you.
There are many reasons that contractors across the UK opt to work under an umbrella company.
Umbrella companies offer an easy way to contract and remove the need for the contractors to worry about the burdens of admin, finances, tax and IR35, all things that limited company contractors have to deal with.
For this reason, many contractors will be weighing up their options and questioning whether it is worth using an umbrella company in 2021. To help make the decision that little bit easier, Umbrella Supermarket has put together this guide on the pros and cons of using an umbrella company.
Any contractor that is considering operating through an umbrella company in 2021 will need to understand Umbrella Company fees - from why an umbrella company charges fees, how they are paid to how much the contractor will pay.
In this guide, Umbrella Supermarket answers those all-important questions to help every contractor know exactly where they stand when it comes to umbrella company fees.
If you’ve made the decision to contract through an umbrella company in 2021, you will next need to find an umbrella company that’s right for you.
After all, there are lots of umbrella companies out there, so how do you know which one to choose?
To help you find the best umbrella company for you, in this guide Umbrella Supermarket outlines what makes a good umbrella company, so you can rest assured you’re making the right move.
One of the many advantages to operating through an umbrella company for contractors is that they become an employee of their chosen provider.
In turn, this means that the contractor will be automatically enrolled onto the umbrella company’s workplace pension scheme.
To help contractors find out more about umbrella company pensions Umbrella Supermarket has put together this handy guide.
If you are considering contracting through an umbrella company you will naturally have questions and queries over how they work.
After all, making the move to umbrella can be a big step for contractors. To help, in this guide Umbrella Supermarket explains how to get started with an umbrella company and share our top tips for using one in 2021.
PAYE or umbrella is a question asked by every contractor. Which one you opt for will have a big impact on your contracting career and lifestyle. So, it's important to make the right decision for you.
To help makes things a little bit easier, Umbrella Supermarket has put together this guide on PAYE or umbrella, outlining the key differences between each, to help you make the best and most informed decision for you.
One of the many benefits to working through an umbrella company is that you will receive holiday pay as well as a range of other statutory benefits including sick pay, maternity and paternity pay.
To find out more about umbrella company holiday pay, and how to calculate how much you will be entitled to, Umbrella Supermarket has put together this handy guide.
Contractors must make several decisions throughout their contracting careers. One big decision contractors have to make is how they will operate.
One way that contractors can work is through an umbrella company.
Umbrella companies have become an increasingly popular way to contract in the past few years, offering many benefits to the contractor. But, how do you know whether this option is right for you?
To help every contractor make the right decision for them, in this guide, Umbrella Supermarket explains when not to use an umbrella company.
There are tons of benefits to using an umbrella company, which is why they have become such a popular option for contractors in recent years.
After all, an umbrella company takes away the stress and hassle of operating through a limited company whilst offering contractors a range of advantages, such as statutory rights, paying them a salary, deducting correct tax levels and National Insurance, and taking care of tasks like expense processing and invoicing.
However, as more and more contractors opt to use the services of an umbrella company, more providers have started to claim that they are HMRC approved.
To bust the myths around HMRC approved umbrella companies and get straight to the facts, in today's guide Umbrella Supermarket look at whether HMRC approved umbrella companies really exist, so you know exactly where you stand.
If you're considering making the leap to contracting, you will understandably want to know how much you will have to pay in umbrella company costs. After all, this amount comes directly out of the contractor’s pocket, so it’s important to be clued up on how much you should expect to pay.
To help contractors, in this guide Umbrella Supermarket answer the all-important question of how umbrella companies cost in 2021.
