The temporary staffing sector has recently undergone a series of legislative changes, including introducing new anti-tax avoidance regulations such as the 2019 Loan Charge and amendments to IR35 (referred to as off-payroll working). As a result, compliantly maximising your pay retention as a contractor is not as straightforward as it once was. This article summarises five top tips to help contractor maximise their pay retention in the UK - ethically and without complication.
Seek assignments that are outside IR35
IR35 has been around since 2000 and has since undergone numerous tweaks by the government. Perhaps the most substantial amendments were the changes to off-payroll rules in the public sector (2017) and the private sector (2021).
To put it simply, a majority of limited contractors can no longer determine their IR35 status. Instead, this has become the responsibility of the end-hirer. These changes have resulted in many contractors being deemed inside IR35 for the first time, and in some cases, unfairly.
Despite contractors having less control over IR35 and how they are paid, the premise hasn’t changed. The best way to legally maximise your pay retention as a contractor is to work on assignments that are outside IR35. There are still plenty of these assignments out there, and as the marketplace has familiarised itself with off-payroll rules, more and more assignments are being presented as outside IR35.
Initially, it was clear that many end-hirers were unprepared for the changes to off-payroll (in both the public and private sectors). As a result, they decided to stop engaging with PSC contractors and only hire temporary staff required to use an umbrella company. However, as time has passed, more and more businesses have gotten up to speed with the legislation.
Should you decide to accept an assignment inside IR35 – it doesn’t mean the end of your PSC career. Instead, you can return to your limited company at a later date and reap the rewards of being outside IR35 again. This is discussed in the next section.
Leave your limited company open should you use an umbrella company at any point
You may decide that even though you’re used to contracting outside IR35 through your personal service company (PSC), you choose to accept an inside IR35 assignment at some point. Assuming the terms of the contract are to your satisfaction – this is a great idea, and there are plenty of advantages of using an umbrella! However, it is also a good idea to keep your limited company operational – even though it won’t come in handy for the outside IR35 assignment you’ve taken.
Most umbrella companies will let you jump on and off their payroll as you please. And, while you’re using an umbrella company for assignments inside IR35, your accountant will more than likely have a special inactive service for your limited company. This could well be the most cost-effective way for you to operate in the new world of contracting.
If you’re used to operating with a PSC and the idea of an umbrella company is new to you – don’t panic. They’re pretty easy to get your head around. However, you’ll retain less of your income compared to contracting through the PSC because you’ll be taxed at source (PAYE – Pay As You Earn). If pay retention is your number one priority, always seek assignments outside IR35. There are plenty of agencies exclusively advertising these types of roles. However, if you decide to take a role inside IR35 – keep your company open, and you can return to it at your earliest convenience.
Engage with specialist contractor accountants that will provide you with value for money
It’s fair to say that most limited company contractors use a specialist contractor accountant to help them with the day-to-day running of their business. Contractor accountants have been around for decades and can help you legally maximise your pay retention while reducing the stressful administrative responsibilities that limited company directors face.
There are also plenty of additional benefits of using a contractor accountant that you may not have considered. For example, many provide their clients with bespoke accountancy software that makes running a limited company more effortless than ever. Or, they may provide you with existing market-leading software such as FreeAgent or Xero – at no additional cost.
As well as software, quality contractor accountants can help with bookkeeping, HMRC correspondence, company set up, tax planning, personal tax returns, payroll, VAT returns, completion of Confirmation Statement, P11D and P60 returns, and more.
One final point that’s worth mentioning is combining a contractor accountant with an umbrella company. Due to the off-payroll rules, many accountants can offer umbrella payroll themselves, or they’re partnered with industry-leading umbrella companies. By choosing an accountant that can help with PAYE payroll should you need it will make your life so much easier.
When it comes to identifying which contractor accountancy package to use, shop around and see what is out there. Monthly accountancy fees will vary between providers, but so will the quality of service on offer. Make sure you get what you're after, and don't pay for extras that you don't need.
Remain compliant with legislation
It’s crucial UK contractors remain compliant with HMRC’s rules and regulations. Since off-payroll rules have changed in the public and private sectors, more contractors than ever before have found themselves inside IR35. Consequently, their pay retention has declined because they’ve been required to be paid by an umbrella company or another PAYE payroll service.
Limited company contractors affected by off-payroll changes have rightfully been angry at both the legislation and the impact on their take-home pay. However, as frustrating as it has been, looking for alternative ways to maximise pay retention is unwise. Numerous disguised remuneration schemes and tax avoidance arrangements have been targeting contractors impacted by IR35 and offering them an easy route to pay less tax and keep more of their hard-earned money.
It may sound tempting to use a scheme that promises you higher earning potential. However, while it may temporarily deliver you higher pay retention – it could result in you facing a life-changing fine from HMRC. Just because tax avoidance is technically legal, it doesn’t stop HMRC from desperately trying to recuperate lost tax from temporary workers who have deliberately taken advantage of a loophole. The Loan Charge (2019) was recently introduced and give HMRC the ability to reclaim underpaid tax from workers – even if they engaged with a scheme years ago or by mistake.
If you’re looking to maximise your pay retention as a contractor, don’t use a non-compliant payroll service. You may initially pocket more of your money, but down the line, you can expect HMRC to come knocking. And if they do – you may be severely punished.
Make sure you value your services correctly
Firstly, it’s essential temporary workers do not undervalue themselves. Traditionally, contractors and freelancers have been paid better than workers in permanent employment because they bring a host of additional benefits. These include specialisms, knowledge, flexibility and experience. Therefore, when negotiating an assignment rate, you should take several factors into account, such as your experience, the job at hand, the likely number of applicants, and the size of the hiring body. Move forward with confidence, and be firm but fair.
If you’re required to use an umbrella company for a specific assignment, you must understand how compliant umbrella companies work and how they will process your payment. For example, umbrella companies deduct the employment costs (Employers National Insurance Contributions and the Apprenticeship Levy) from the assignment rate – and you need to take this into account before agreeing to the rate with your agency or end-client. Plenty of recruitment agencies already offer an umbrella company uplift for assignments that require the temporary worker to use an external PAYE service.
This article has been written by Andrew Trodden, Marketing Team Leader at Umbrella Company UK.