With the deadline for filing a self-assessment tax return fast approaching at the end of January 2024, it's always worth double-checking whether, as an umbrella company, you need to submit one. After all, if you need to submit a return and fail to do so, you are liable to be fined by HMRC.
At Umbrella Search, we know it can be confusing to understand when it is necessary to file a self-assessment when working as a contractor, with many types of workers, such as self-employed contractors and limited company contractors, being required to do so.
To help, we have put together this handy guide explaining when it would be necessary to file for self-assessment and which umbrella company contractors need to do so.
What is a self-assessment tax return?
A self-assessment tax return is one way that HMRC collects tax from workers in the UK.
For those who are employed, tax is typically deducted from their salary by the pay-as-you-earn (PAYE) tax system.
However, those who work off-payroll, such as self-employed and freelance workers, are required to fill out and submit a self-assessment tax return. This outlines to HMRC how much they have taken in income within the tax year, how many expenses they have incurred and how much they owe in tax.
You must work out exactly how much income you have received, whether that's from work or other investments, as well as how many expenses you have incurred and which categories these fall into, such as equipment or travel. In order to file a self-assessment, you must keep accurate records of income and expenses, including receipts and invoices.
The deadline for filing self-assessment is the 31st January and covers the previous tax year which is the 6th April to the 5th April of the previous year.
Having submitted your self-assessment to HMRC you will then find out exactly how much tax you owe or are owed if you have overpaid tax in the previous year.
Who needs to file a self-assessment tax return?
Those who work as self-employed or freelance workers who earn over £1000 in a year must file a self-assessment as this lets HMRC know exactly how much they have earned and what tax they owe for any given tax year.
However, as well as off-payroll workers, there are also several other instances you must file for self-assessment, including:
- You are a partner within a business
- You have received income from dividends, investments or savings of more than £10,000
- You have received income from property, including rent
- You have received foreign income
Do umbrella company contractors file for self-assessment?
Umbrella company contractors will be relieved to learn that they won’t usually need to file a self-assessment.
This is due to fact that an umbrella company will employ the contractor. This means that the contractor is put onto the umbrella company’s payroll and that they will pay tax through the PAYE system.
The only reason an umbrella company contractor may have to file for self-assessment is if they receive any other additional income on top of their umbrella company salary.
This includes any of the reasons listed above such as additional income from property, investments or dividends.
How does an umbrella company contractor pay tax?
As we have mentioned, an umbrella company contractor pays tax through the PAYE system rather than self-assessment.
So, every time the contractor is paid, the correct levels of tax and National Insurance are deducted from their pay. This is all worked out by the umbrella company, and you will see exactly how much you've paid in tax on the payslip you will receive each time you're paid. This removes the need for umbrella contractors to file a self-assessment, meaning one less task for the contractor to worry about.
So what exactly is deducted from your salary through an umbrella company?
Income tax: every worker in the UK must pay income tax, whether they are employed or self-employed. If you earn more than the personal allowance threshold, which currently sits at £12,570, then any earnings above this amount are taxed at 20%. There is also a 40% tax band for higher earners. Income tax is automatically deducted from an umbrella company's salary each month, meaning you are always up to date with how much tax you owe.
Employees National Insurance: this is another tax taken off your salary. When you work with an umbrella company, this is again worked out and deducted from your pay before you receive it, meaning you're always up to date. National Insurance bands will vary depending on how much you earn and you can find out more about the current bands here.
Unless you have additional streams of income, umbrella company contractors will not be required to file a self-assessment, which can often be tricky and time consuming. This is just another benefit to working through an umbrella company, saving you a lot of time, energy, and stress you would otherwise incur.
With this in mind, if you think that this new year is the perfect time to start using the services of an umbrella company, we’re here to help.
Take the next steps with Umbrella Search
One of the many advantages of working with an umbrella company is that contractors don't need to get involved in finances and taxes. In fact, contractors don't need to worry about admin, paperwork, expenses, statutory benefits, or insurance either.
That's why this is such a popular route for contractors. If you want to join the thousands of contractors already contracting through an umbrella company, we are here to help.
Simply get in touch with our team of professionals and we will work closely with you to find the best umbrella company out there.