Inside IR35 Checklist
This inside IR35 checklist is for contractors caught by the IR35 legislation who must work through an umbrella company. This checklist assumes that the IR35 assessment has been performed correctly.
Agree Assignment Rate
Once you accept an inside IR35 contract, you must agree on an assignment rate with the end hirer. The client may have already decided on the assignment rate in advance; however, you’ll need to negotiate if they haven’t.
It’s important to remember that the assignment rate is different to gross pay. It consists of employment costs, the umbrella company’s margin, and the actual wages payable to you (your gross income).
Given the above, inside IR35 rates are usually higher than outside IR35 rates, although unfortunately, not always by enough to offset the increased tax liabilities. There is no fixed rule, but most contractors ask for a 20% and 30% uplift on their outside IR35 rates.
You can use our Inside IR35 (Umbrella Company) Calculator to help determine what contract rate you should be asking for.
Find An Umbrella Company
Once you accept an Inside IR35 contract, you’ll need to find an umbrella company to work through. There are other methods of working Inside IR35 (agency payroll, client payroll, etc); however, working through an umbrella company is the most common.
Our guide on How to Choose an Umbrella Company will help you decide which one to go for.
Once you have decided which umbrella company to work through, a contract of employment is signed, effectively making you an employee of the umbrella company for the length of the contract.
Remember, recruitment agencies and end clients often have a preferred suppliers list, an exclusive list of umbrella companies they work with. If you want to work with a particular agency or client, your choice of which umbrella company to use could be restricted.
Consider Insurance
Unlike Outside IR35 contracts, where you work through a limited company, there are no insurance requirements while working through an umbrella company.
That said, you may want to consider taking out:
i) End Client and Umbrella Company Default Cover
This is designed to cover you for outstanding invoices should your end client or umbrella company go bankrupt or be put into administration while still owing you money.
ii) Illness and Injury Cover
Insurance designed to reimburse you should you fall ill or become injured and be unable to work. As an umbrella company employee, you are entitled to statutory sick pay; however, the allowance is relatively low compared to what most contractors are used to.
iii) Jury Service Cover
This insurance compensates you based on your contractual day rate should you be called up to jury service and be unable to work.
There are no legal requirements for you to maintain insurance while working through an umbrella company, so the above are for peace of mind only. All are provided by the IPSE offers as part of its protection benefits.
Consider IPSE Membership
While not a necessity, you may want to consider becoming an IPSE member. IPSE is a community that supports the self-employed with advice, contract reviews and other membership benefits. They release news updates, host regular events, and their ‘Plus’ membership includes the insurance mentioned in step 3 above.
IPSE Membership is less relevant for Inside IR35 contracts than for outside IR35 contracts, as with inside IR35, you are effectively an employee of the umbrella company for the duration of the contract. You are not considered ‘self-employed’.
That said, joining the IPSE is an excellent way to stay updated with relevant industry news. Costs range from £99 per year for the Essential plan to £350 per year for Plus.
Consider Your Tax Code
Your personal allowance reduces by £1 for every £2 that your adjusted net income is above £100,000, meaning it reduces to zero if your income is £125,140 or above. HMRC reflect your adjusted allowance in your tax code. A tax code of 1257L reflects the full personal allowance, while 0L reflects no personal allowance.
As a rough guide, a contractor earning £525 per day, working 220 days per year, and making no pension contributions will breach the £100,000 threshold.
Although inside IR35 contractors working through an umbrella company will have their taxes deducted at source, ensuring the correct amount of tax is paid remains your responsibility. If you think you will generate more than £100,000 in taxable income, it is up to you to let HMRC know. The umbrella company will not do this.
You may underpay tax if you don’t contact HMRC and your tax code is incorrect. If this happens you will face a large lump sum tax bill at the end of the year. You can check your tax code, Personal Allowance and estimated income via HMRC’s online portal.
HMRC’s phone operators are well-versed in discussing tax codes and your options. It’s best practice to give them a ring and explain your contract rate and how much you think you will earn in the tax year. They will then decide whether your tax code is correct or needs adjusting. If it needs adjusting, they will automatically issue an updated code to your umbrella company.
Many contractors increase their pension contributions to ensure their qualifying income remains below the £100,000 limit and they receive the total personal allowance.
Consider Self-Assessment
A question we are often asked is: “If I’m working Inside IR35 via an umbrella company, do I need to register as self-employed?”. The short answer to this is: it’s unlikely.
If your only income in a tax year is paid through an umbrella company, and you don’t meet any of the criteria outlined in our Self-Assessment Guide, you won’t be required to submit a self-assessment tax return. However, there are several additional criteria that, if met, mean you will likely be required to submit a self-assessment.
You must submit a self-assessment if you have worked outside IR35 via a limited company during the same tax year as you have been engaged via an umbrella company. Alternatively, if you think you have overpaid tax and are owed a rebate, then submitting a self-assessment is in your interest.
You can use this tool from HMRC to check whether you need to submit a tax return and this tool to register for self-assessment.
Working And Timesheets
Once you start working, you must provide a timesheet detailing the work hours for each contractually agreed payment cycle (usually weekly). These are typically submitted through an online portal and countersigned by your client.
The umbrella company will invoice the end client directly, the amount being determined by the contractually agreed rate and the number of hours recorded in your timesheets. The umbrella company will then deduct employment costs and their margin from the amount received.
The remainder (minus any pension contributions) will be paid to the contractor via PAYE. With PAYE, all taxes are deducted at source so there will be no additional administration required. The amount you receive into your bank account will be net of all taxes owed.
Avoid The 60% Tax Trap
The standard personal allowance is £12,570 per year. However, if your income exceeds £100,000, this is reduced by £1 for every £2 over £100,000. What this means in real terms is that, for every £100 you earn between £100,000 and £125,140, you only get to keep £40.
Of the £60 you don’t keep, £40 is deducted in income tax, and £20 is lost to the taper. As this is an effective tax rate of 60%, it is known as a ‘tax trap’.
Most contractors try to avoid the 60% tax trap by paying more into their pension, reducing their qualifying earnings below the £100,000 threshold. Not only does this save income tax, it boosts your retirement fund at the same time.
If you want to contribute to a pension, you must decide whether to contribute to a workplace pension or sacrifice salary into a SIPP. Most contractors opt out of the workplace pension and contribute to a SIPP of their choosing. As salary sacrifice reduces income tax and national insurance, it is the best option for those seeking to minimise their tax liabilities.
You must speak to your umbrella company if you want to contribute via salary sacrifice. Given the extra administrative burden, it often comes with supplementary fees, although these are usually minimal.
Build A War Chest
A ‘war chest’ is a cash reserve that acts as your rainy-day fund, a financial fallback intended for use if your income drops. As a contractor, your income can drop for any number of reasons.
You may be forced to take sick leave. A client could be late paying an invoice. Or, most commonly, you may not be able to find a contract, experiencing a break between assignments. It is a very real possibility that you go for months without work (and income).
If this happens, you must have money put aside to cover your outgoings, particularly if you have dependents like children. Although you should already have a war chest before starting to contract, I recommend topping it up with whatever you can afford when working.
How much is enough? Only you can answer that based on your monthly outgoings. A good rule of thumb is to save enough so that you can survive if you go without income for 6 to 9 months. Although this may sound excessive, the more you save into your war chest, the less stressed you’ll be when you go through a period without work.