What are my working options if I’m ‘inside’ IR35?

If you receive an ‘inside’ SDS, you don’t have to stop contracting or close your PSC. There are plenty of payment options available depending on your circumstances so you can keep enjoying flexible working and maximise your take-home pay. Here we explain your payment options and other financial implications to consider if you’re caught by IR35.

The temporary recruitment market was massively altered by the Off-payroll rules (IR35 reforms ) in April 2021. Although you may now find some of your roles are considered ‘inside’ IR35, this shouldn’t stop you from making the most of self-employment. In fact, there are multiple options available to you to help you maximise your take-home pay and keep thriving in your freelance journey.

For example, if you believe most of your contracts will be ‘inside’ IR35 from now on, then becoming an employee of an Umbrella company, such as Workwell Umbrella, may be best for you. However, if you think you may be switching between ‘inside’ and ‘outside’ contracts, or your ‘inside’ contract is very short-term, then there are other avenues available, such as our IR35 Switch solution.

What are my options?

Umbrella Employment

Umbrella employment is one of the easiest and simplest ways to work flexibly if you’re ‘inside’ IR35. Often, freelancers engage with umbrella companies when they want to take their first steps into contracting but don’t want to go straight into setting up a limited company.

The Umbrella company sits between the recruitment business and the contractor in the supply chain. To contract this way, you will become an employee of the Umbrella company, which will then supply your services as its employee to other companies (end clients or recruitment agencies).

As an employee of the Umbrella company, you will be paid via their payroll. You will be required to complete a timesheet for each pay period, which, once signed by the end client, can be passed onto the agency. Your employer (the Umbrella company) will raise an invoice for the number of hours you’ve worked and will send this to the agency, which in turn will invoice its client (the company you’re providing services to). This may sound complicated, but you can find a more detailed explanation of how you’re paid through an Umbrella company here .

Although you can no longer structure your payments with the same level of tax efficiency as you could through your limited company, there are some great benefits to umbrella employment. For example, you should generally have statutory employment rights such as sick pay and parental leave. The exact benefits will vary depending on the umbrella you choose, though at Workwell Umbrella , benefits include a wide range of insurance cover (as standard), the option to continue paying into your SIPP/private pension if you wish, our exclusive rewards and partnerships programme which offers discounts on hundreds of high-street brands, and access to our mental health support hub – in addition to all your statutory employment rights.

If you’re going to continue working on ‘inside’ contracts for a while, Umbrella employment is a great option that allows you to enjoy the freedom and flexibility of contracting while providing access to a wide range of employment protections and benefits.

Continue working through your PSC

Contrary to popular belief, just because you’re ‘inside’ IR35, you don’t have to close your PSC. There are certain times when taking “deemed” employment payments through your limited company may be suitable. For example, if you’re working on more than one contract at a time (some ‘inside’ and some’ outside’ IR35) or you’re working a very short-term role, you may choose to put all payments through your PSC, no matter their IR35 status. This will allow you to manage your income in one place, meaning you can retain control over salaries, invoice dates, etc.

If you choose to work in this way, your fee payer (typically your agency, though this may occasionally be your end client) will need to pay your company through their payroll. They will be required to deduct Income Tax, Employees’ National Insurance, Employers’ National Insurance, and the Apprenticeship Levy, before paying you a net salary. Once you receive payment from the fee payer, this can be paid from your company to yourself. You will not be required to make any further deductions to this amount as it has already been taxed. You can continue to pay yourself dividends (where you have available profit from any ‘outside’ roles) as you usually would, though it is generally recommended not to process separate salary payments from your PSC. If you need help with structuring your payments in this way, our experts can walk you through it.

Although this may be suitable in certain situations, for most people there are no benefits to working this way as you will be taxed the same as if you were working through an Umbrella, without having access to any of the benefits of Umbrella employment or the tax freedoms of PSC working.

Use Umbrella & PSC (IR35 Switch)

An option to consider if you’re not sure about the status of your future assignments is to sign up for a service that allows you to switch between PSC and Umbrella working, such as our IR35 Switch solution. IR35 Switch is a perfect option if you’re caught by IR35 but believe you will be considered ‘outside’ in future roles. You will have the freedom to work both ways: ‘outside’ through your PSC and ‘inside’ through Workwell Umbrella.

With this flexible service, when you’re caught by IR35 and working with Workwell as your limited company accountant, you can ‘rest’ your PSC, pausing your operations while you work through our Umbrella. Your PSC accounts will be managed in the background, and your payroll (RTI) and VAT returns will be submitted, as appropriate. This means both you and your company remain compliant with legislation while you enjoy all the benefits of working through an umbrella company.

For as long as you’re working through Umbrella, your timesheets and payslips will be managed as they usually would for Umbrella employees. Then, as soon as you begin an ‘outside’ contract, you can switch back to working through your PSC, paying yourself a mixture of salary and dividends, as usual. This enables you to have all your finances looked after in one place, no matter their employment status.

This way of working is great for people who don’t want to give up the tax efficiencies of limited company contracting but may be required to take on a mixture of ‘inside’ and ‘outside’ contracts throughout their career.

Employment/PAYE roles

You may decide that you will work via an ‘employed’ or otherwise ‘PAYE’ role. If this is the case, ensure you register online with HMRC as an individual and regularly check that your payroll deductions appear on your account accurately within a few weeks. It’s important to keep on top of this to ensure you’re being paid and taxed correctly.

If you can’t see the correct payroll deductions or see deductions you don’t recognise, you must ask your employer to explain the discrepancy or recalculate the deductions. In some cases, individuals are being presented with a payslip that is compliant with HMRC’s tax requirements, but the employer or deemed employer is paying incorrect amounts of tax, causing the individual to be liable for incorrect and unpaid tax. You can avoid this by keeping an eye on your HMRC account to ensure your supply chain is acting compliantly.

Get in touch with us to find out more about this way of working.

Individual Self-Employment

In some circumstances, your supply chain may not be able to approve you working ‘outside’ IR35 through a limited company, due to the Off-payroll rules, but they may be happy with the idea of you working as a self-employed individual instead. In these situations, similar employment status rules apply but the way they operate and where the liability for underpaid tax might fall is different.

If this option is available, before making this decision, you should seek advice from a specialist contractor accountant, like Workwell.

Closing your company

As a last resort, you may decide that closing your limited company is the best solution for you. One reason this may become appropriate is that after a long time working ‘inside’ IR35, it can become increasingly difficult to operate in the same way you did before. For example, taking expenses can become almost impossible if you reach the point where you’ve effectively ceased to trade through your PSC.

If this is the case, you may choose to close your limited company. Depending on your circumstances, a members’ voluntary liquidation may provide additional tax efficiency upon closure, though this will depend on the assets in your business, your personal circumstances, and your company’s trading history.

Our contractor accountants can help you if you decide that closing your company might be appropriate for you.

Are there other factors to consider?

In addition to choosing a new working structure such as Umbrella employment or IR35 switch, there are some other financial factors to be aware of if you’re caught by IR35.

1) Negotiating rates
Sometimes, it may be appropriate to negotiate rates with an end client who has issued you an ‘inside’ IR35 SDS to help make up some of your take-home pay if you’re being taxed as an employee would be.

While this can be a difficult conversation to broach, it is always beneficial to have transparent discussions about pay with your end client, even if they do decide not to amend your rate. Though hirers may be fixed on their rates now, they may become more flexible and willing to negotiate pay rates over time.

2) Schemes & artificial arrangements
No matter which working option you choose, it’s vital you avoid getting caught up in artificial arrangements or payment schemes. If you’re issued an ‘inside’ SDS by your supply chain, then any solution that claims to mitigate your tax position or afford you more take-home pay than other ‘vanilla’ options (like simple Umbrella) is likely using a scheme that will trigger a personal liability as you won’t be paying the correct tax on your income. In many cases, these tax avoidance schemes occur within non-compliant Umbrella companies that claim to help you pay less tax by treating all or some of your income as a “tax-free bonus” or “loan”. To avoid getting caught up in these schemes and facing financial penalties, make sure you’re thoroughly checking the compliance of your entire supply chain, working with companies that are FCSA-accredited and dedicated to transparent pay and compliance with HMRC, like Workwell.

Remember, just because a company claims they’re “registered with HMRC”, it doesn’t mean their solution is safe and compliant. Any payroll provider must be “registered” with HMRC, so this isn’t evidence of a compliant solution. Before selecting any payroll provider, make sure you understand how your payment will be processed and that you recognise every party in the supply chain and your contract. If other entities are present in the chain, find out who they are and why they’re there. If you’re unsure about the compliance of a provider, it’s advisable to go elsewhere to protect yourself from risks.

3) Tax planning
When you’re working ‘inside’ IR35, you will have more tax to pay so it’s advisable to take some tax planning advice to help you compliantly retain as much take-home pay as possible.

For example, in a typical ‘outside’ PSC arrangement, you will take your PAYE allowance during the tax year from your company as a salary. If you have other taxable income or are paying an employee, you may choose to take less. You may be able to process tax-deductible expenses and make pension contributions for yourself and your employees to reduce the company’s taxable profits. Company profits, after corporation tax, can then be drawn via dividends at a time that suits you. This is a very tax-efficient way of working.

When you’re working ‘inside’ IR35, however, the tax advantages are significantly reduced. So, if you’re continuing to manage your PSC while taking on ‘inside’ contracts, it may be advisable to reduce the level of your salary to little/nothing since taking a salary from your PSC in addition to PAYE income will quickly raise the tax band you’re in and the marginal rate of tax you’ll pay on that income.

Here to help

Although ‘inside’ working provides fewer tax and employment freedoms, there are many ways to work ‘inside’ compliantly to maximise your take-home pay without switching to permanent employment.

Whether you’re seeking a great Umbrella employer, looking for a flexible way to operate ‘inside’ and ‘outside’ contracts compliantly, or thinking about closing your PSC, you must speak to a professional contractor accountancy practice, like Workwell, before making any decisions. Get in touch on 01923 257 257 for help and advice from our experts.