Being a freelancer or a contractor can give you a lot of extra freedoms in the working world, but it also comes with the extra responsibility for managing your finances, taxes, and pension, amongst many other things.
We are lucky to be in a time and technological age where we can break out of the traditional limitations of the working environment – many people seek a better work-life balance, working hour flexibility, or the opportunity to work from home to be closer to their families. Whatever the motivation, there’s never been a better time to go solo.
But going it alone is no easy choice – the idea of ‘being on your own’ in a very real sense can be pretty daunting. It’s your own responsibility to manage all your finances including taxes and pensions, as well as planning ahead for holidays and sick days. Since you won’t be paying PAYE, it’s up to you to make sure that your Self Assessment is submitted and that your taxes are paid in a timely manner. As a rule of thumb, a freelancer should hold back at least 25% of their earnings for taxes and overheads (like accountant’s fees).
An umbrella company is go-between for a contractor and a client – they handle the administration of being a contractor, including payroll, taxes and invoicing, leaving the contractor to focus on the work they’ve set out to do.
As a contractor, if you decide to use an umbrella company, you’ll sign an employment contract with the umbrella company as your employer, and you’ll agree that the clauses of the clients contract will be passed on to you. The umbrella company will then sign a contract with the client. You’ll work your hours for your client and then submit your hours worked to the umbrella company on a project, weekly or monthly basis. At that stage, the umbrella company takes over the administration – they invoice the client according to the information you’ve given, collect (and if necessary chase) the payment from the client. The umbrella company will then deduct their fee, process any client agreed expenses, as well as pay your PAYE, National Insurance contributions and Student Loan (if you’re making repayments). After all that, the umbrella company will then pay you your wage.
Any expenses that you claim directly from your client are not affected by tax regulations. Depending on your exact working situation, some of your expenses could give you some tax relief, but the rules have recently changed.
It used to be that, since contractors often work at various locations, these ‘temporary workplaces’ meant that you could offset travel and subsistence costs for getting to and from different sites. The umbrella company would have done this on your behalf by claiming a taxable relief on benefits that are claimed for through PAYE (this was known as Salary Sacrifice arrangements).
However, with the start of the 2016 tax year and the introduction of the Finance Bill 2016 (under IR35 legislation), that all changed. Now there is a ‘Supervision, Direction or Control’ (SDC) restriction applied to contractors’ tax relief for home-to-work travel expenses when claimed through an ‘employment intermediary’ (i.e. an umbrella company). This means that contractors working through an umbrella company cannot normally receive tax relief for travel and subsistence costs.
The SDC guidance helps to work out who is truly self-employed and providing their expertise to clients through their own company, or who could be classed as a ‘disguised employee’ and therefore should be taxed as any other employee under IR35. If any one off this list applies to you, then you will be taxed as any other employee.
If you feel that your working situation does not fall under the SDC restriction, and you would like to claim travel and subsistence expenses, you can ask your umbrella company for a contract review and complete an SDC questionnaire – only when it is clear that SDC does not apply to you, will the umbrella company be able to claim a taxable relief on expenses for you.
If you choose to contract through an umbrella company, and you fall under the SDC regulations (meaning that there is no additional tax-relief that might affect your income), then you do not need to submit a Self Assessment. If you are out of scope of SDC regulations, then any expenses claims above £2,500 per year will have to be claimed through Self Assessment and your working situation will be subject to regular review to make sure you are still outside the scope of SDC.
With GOV.UK Verify, you can complete and submit your Self Assessment online. To do this, you’ll need to have your identity checked, which is where CitizenSafe can help. We’re a certified identity provider for Verify and we’ll confirm your identity so that you can access Self Assessment and many other GOV.UK services online.
Tax is inevitable, but it doesn’t have to be difficult – to make it a bit easier, we created the CitizenTax app. With CitizenTax, you can find out if you need a self-assessment, or use the Inheritance Tax or Net Salary calculators. CitizenTax is available through iTunes and GooglePlay.