What is the purpose of umbrella companies within social work?
Many social workers are required to use compliant umbrella companies to receive their payments so the local authority (and recruitment agency) can be assured the correct amount of tax is being deducted through the PAYE system. In April 2017, the government took a decision to make all public sector organisations responsible for unpaid taxes should HMRC identify situations where a contractor is working outside IR35 (i.e. via their own limited company) when in reality they should be deemed as inside IR35 and paid on a PAYE basis. In order to avoid the potential risk of paying backdated tax bills for incorrect IR35 assessments, most organisations in the public sector took the decision that all interim contractors must be paid on a PAYE basis to make sure the appropriate taxes are being deducted at source.
If you are registered with a fully compliant umbrella company you are essentially employed by the umbrella company, which is why they can make PAYE payments directly to you. You are entitled to full statutory benefits (i.e. maternity pay, sick pay, etc) and you have full employment protections and you will also be covered by the umbrella companies insurance policy. You also have the flexibility to move contracts or work on multiple contracts whilst using the same umbrella payroll company; which means you don’t have to register with a new provider every time you change contracts. Depending on which umbrella company you choose, you might also receive some additional benefits through an employee reward scheme, although this will depend on whether your umbrella company operates any employee benefit schemes.
What is the difference between PAYE and Ltd?
The main difference is that limited companies enable contractors to make use of more tax efficient methods to help increase the amount of money they can take home through their contract assignment. For example, limited company contractors can receive payments in the form of dividends from their company which attract a lower rate of income tax, making them a more tax efficient way to receive payments. You can also claim tax relief on a wide range of business expenses which helps to reduce the amount of tax you are liable for.
Whilst you can take home more money if you are able to operate through your own limited company (i.e. you are deemed outside IR35), you will have to manage the administration of the company, keep accurate records and, as the Director of the company, take on additional legal responsibilities. This is why an umbrella company is often a more favourable, hassle-free option for contractors as you have very few responsibilities and you don’t have to use an accountant to handle your company affairs.
What does inside and outside IR35 mean?
IR35 is a set of rules used by HMRC to assess a contractor’s employment status. It also determines what options are available to the contractor on how they deliver their services (i.e. through a limited company or through an umbrella payroll company). Subsequently, it also determines how they should be taxed. The main purpose of IR35 is to ensure that a temporary contractor doesn’t benefit from more favourable tax arrangements in comparison to a permanent employee who works at the same company/end client and does the same job.
If the nature of the contract you work on is considered to be Inside IR35, this essentially means that you are doing the same (or very similar) job as a permanent employee and should be taxed on a pay as you earn (PAYE) basis. This is where your tax and national insurance contributions are deducted at source through a payroll system. In this scenario you would require the services of a PAYE umbrella company.
Alternatively, if the nature of the contract is deemed to be Outside IR35, you will have more freedom on how you provide your services as a contractor and will have the option to work through your own limited company where you can benefit from more favourable tax rules. Some public sector contract assignments can be classified as outside of IR35. Although this will usually apply if you are on a special projects team.
What are the dangers social workers should look out for when choosing an Umbrella Company?
Quite simply, avoid any umbrella company who offer unrealistic take home pay percentages (i.e. 75% – 90%). It doesn’t matter what the umbrella company tells you, this level of take-home pay is not realistic and cannot be achieved compliantly.
If you are tempted to use a non-compliant umbrella company who offer this level of take-home pay, you can expect to be contacted by HMRC further down the line and receive a demand for the value of your unpaid taxes. The longer you use the scheme, the greater your unpaid tax liability will be. You won’t receive any support from the umbrella company or scheme provider as they will not challenge HMRC on your behalf.
As an umbrella company, what’s the best advice you can give social workers seeking an Umbrella Company?
You need to remember that it is your responsibility to ensure you chose an umbrella company who manages your taxes compliantly. If you make a poor choice, HMRC will collect the unpaid taxes from you: not the umbrella company you used. We recommend:
- Only consider using an umbrella payroll company that holds a professional accreditation (i.e FCSA)
- You should only receive one payment from your umbrella company for your wages. If your umbrella company makes 2 or more payments to you, that suggests they are operating a non-compliant scheme
- If it sounds too good to be true – it probably is. Don’t be fooled by the convincing sales people who are trying to sell you their highly lucrative service.
- If you have any doubts about the take home rate being offered to you, get in contact with a reputable, accredited umbrella company. They will gladly assist you and help you make your own mind up.
If you have any questions about the information provided above, please get in touch with a member of the team at Mortimer Childe. We will be very happy to help in any way we can. Mortimer Childe are proud members of the FCSA and provide fully compliant umbrella payroll services across the social work sector.
We have an exclusive package for the One Stop Social community which includes:
- Discounted administration fee (£15.00 per week)
- Membership to our employee discount and rewards scheme
- Access to a cashback healthcare plan, including £10,000 personal injury insurance
- Free Self-Assessment Tax Return’s (for basic tax returns should you require one)
- Support on claiming tax relief on expenses via P87 claim
- Pro-active tax code management, to ensure you are paying the correct amount of tax
- HMRC Liaison Service – to help you resolve any issues you have with the tax office
- Advance Payment Guarantee (if your timesheets are approved late – we make sure you receive your payment on time)
- Contractor referral schemes
- Access to specialist contractor mortgage advisors who offer a commission rebate