If your client/agency has considered that your contract falls within IR35 rules, then they would usually provide you with a couple of options to choose from.
Option 1 – Using an umbrella company
Under this option, your client should give a list of umbrella companies for you to choose. Please note that your agency/client cannot force you to choose a particular umbrella company. Operating under an umbrella company means your contract income is subject to full PAYE Tax and NI. The umbrella company will deduct these PAYE taxes and their margin as well before paying you. Usually, an umbrella company will process your weekly/monthly payslips based on the timesheet submitted. They would then deduct income tax and employee national insurance and their fee as well. The umbrella company will provide you with a weekly/monthly payslip, and the net salary will be paid to your personal bank account. Some umbrella companies fees might be more than £1,500 per annum or even a percentage of your contract, therefore you should consider them carefully before choosing one.
If you are planning to use an umbrella company, then you should request your agency/client for a take home calculation so that you can compare with other options such as operating via a PSC or even with a similar permanent role.
Similar to a permanent employment, an umbrella company would issue a P45 when you leave them and issue a P60 at the end of the tax year. Also note that under this option, you will not be entitled to get any holiday pay, sick pay or any other benefits.
Option 2 – Using your own Ltd company (PSC route)
This option lets you use your own Ltd company. Your agency/client will initially agree with you a new daily rate on which they will deduct the weekly/monthly income tax and employee NI. If your company is VAT registered, then your company will receive weekly or monthly Gross income which will include 20% VAT.
For example: If you invoice your client £10,000 plus VAT per month, your client/agency will deduct all the income tax and employee NI, say £3,000 and they will pay your company £7,000 + £2,000 VAT = £9,000 Gross
Once you receive £9,000 into your company account, you can transfer the NET, i.e. £7,000, immediately to your personal account as a non-taxable salary. Your accountant should report this non-taxable salary to HMRC to make sure that the income received into the company account is not double taxed. This way, all of the NET income received into the company account will be taken out as a salary, leaving zero profits in the company account. This means there will be NO corporation tax payable when working inside IR35 using your own Ltd company.
Additionally, there will be a significant VAT savings made when operating via the Ltd company, especially if your company is under the VAT flat rate scheme. From the above example, if your company receives £9,000 Gross and a VAT flat rate of 16.5% applies, then the VAT payable to HMRC would be £1,485 (£9,000 * 16.5%). The VAT savings made here is £515 per month (£2,000, less £1,485). This savings can be used to cover the running costs of your company, i.e. accountancy fee and other costs. The take home would be slightly higher via a PSC due to the VAT savings made using a Flat rate scheme, which could be thousands. This extra savings is not available when operating via an umbrella company.
Any VAT savings made from the Flat rate scheme would still be subject to PAYE/NICs payable from company account.
From our experience, we have noticed that most of the contractors prefer to continue to use their own Ltd company, even when working inside IR35. Generally, Contractors enjoy the freedom of being independent and this helps them run their own private business. They will have full autonomy on how they work with multiple contracts and allows a greater opportunity to take the funds from the company account in a tax-efficient way.