If you are a contractor, or work through an agency, employment business or umbrella company, use this quick summary to understand some of the key things you should think about if you are changing the way you work.

We know there are many different ways you and other contractors might work. The tax rules for contractors are different depending on how you work.

You may be working through your own company or other intermediaries, such as a partnership or another individual. You can also be providing your services direct to a client, through an agency or through an umbrella company.

If you work for several different organisations, you might be working in a different way for each of them, and the rules will apply to each engagement individually.

The way you pay tax might need to change if:

• You work through your own limited company - as the tax rules changed on 6 April; or,
• You have recently changed the way you work - for example moved from a limited company to an umbrella company.

Things to be aware of if you work through your own company or other intermediary

You may be working through your own limited company if you provide services to a client and invoice them for your work, and usually you have a material interest in the company you work through. This is sometimes called a ‘personal service company’ (PSC), and more information can be found in the Employment Status Manual here and here.

If you work in this way, you need to think about the off-payroll working rules, commonly known as IR35. These rules also apply if you work through a partnership or another individual. The off-payroll working rules changed on 6 April 2021 and either you or your client will be responsible for considering the rules, depending on the size of your client.

Our flowchart can help you to understand whether the off-payroll working rules apply, and you may also find our factsheet and other help and support useful.

If you work through an umbrella company then it is unlikely (although not impossible) that you are working through your own limited company, and so the off-payroll working rules won’t apply.

If you have recently stopped working through your own limited company and now work in a different way, you may need to:

• Make a decision about what to do with your limited company. For example, you may want to consider whether to close it down if you are no longer working through it. You can find more information on GOV.UK or with a professional advisor.
• Make sure the rules are applied up until you changed the way you work. For the year 2020-2021, the rules will either be the responsibility of your client if you provide services to the public sector, or your own company if you provide services outside of the public sector.

Things to be aware of if you work as an individual (or sole trader)

If you are working as an individual and not through your own limited company or other intermediary, then you will either be employed or self-employed.

You could be working directly for a client, or be working through an agency or umbrella company.

If an employment agency finds you work then the agency may be responsible for deducting Income Tax and NICs before they pay you. You can find more information on the agency rules here.

If you are working through an umbrella company then you are most likely working as an employee of the umbrella company, meaning the off-payroll working rules will not apply.

The umbrella company will deduct certain costs from the fee they receive for your work. This includes administration costs (or sometimes this is charged separately to you), employer pension contributions, holiday pay, other amounts to cover specific costs, such as apprenticeship levy. The rate paid to the umbrella company will also cover the cost of employer NICs and they will use this money to pay employer NICs contributions, and not deduct it from your gross pay. Your gross pay is then subject to Income Tax and Employee NICs.

We have recently published information on what an umbrella company is and what it means for your tax and pay.

GOV.UK has more information on employment status.

Things to know about tax avoidance schemes

If you are changing the way you work, don’t get caught out by tax avoidance schemes.

Most umbrella companies are compliant with the tax rules, but some aren’t.

Some umbrella companies may claim to allow you to keep more of your earnings than others; which means it could be a disguised remuneration tax avoidance scheme. They could also involve third parties. Tax avoidance schemes do not work, including those that may claim to be tax efficient or offer to increase your take-home pay. They sometimes carry high, non-refundable fees and are often provided by, or through, offshore promoters.