Generally speaking, contractors and freelancers employed by an umbrella company do not need to submit a personal tax return because they are taxed at source (PAYE).
However, in some circumstances, individuals using umbrellas are still required to complete a tax return and pay additional income tax to HMRC.
This could be because you or your partner receive child benefits or you have other sources of income – possibly from investments in renting out a property.
Keep reading, and we’ll explain more about umbrella companies and tax returns – to help you identify whether or not you need to submit one.
Umbrella companies and PAYE
More and more people use umbrella companies, especially due to the April 2021 ‘Off-Payroll’ legislation, which significantly reduced the number of limited company contractors working for end clients.
By processing payroll with HMRC’s tax system Pay As You Earn – umbrella employees are taxed at source and receive their net salary after all the deductions have been processed by the umbrella and sent to HMRC.
If a worker’s only source of income is from an umbrella company, they will not need to submit a personal tax return. This is because they will have paid their fair share of tax and national insurance (PAYE).
However, if an umbrella employee has any additional sources of income, they may be required to complete a tax return and submit it for the appropriate tax year.
When do umbrella company employees have to file a tax return?
If your only income in a tax year (from April 6th to April 5th) is paid to you through an umbrella company, you won’t be required to submit a self-assessment tax return.
However, if you have any additional sources of income, you might need to pay tax on it.
Despite being paid for your temporary assignments through an umbrella company, if any of the following applies to you, you might need to complete a self-assessment tax return:
You’re a company director with income through this business that is not taxed under Pay As You Earn (PAYE).
You earn money via renting properties (buy to let).
Before tax, your annual income exceeds £150,000.
You have income from trusts and settlements.
You have claimed over £2,500 worth of expenses.
You have capital gains.
You have received an inheritance.
You have experienced changes in your tax code, resulting in underpaid tax throughout the tax year.
You have income from savings and investments that exceeds £10,000.
You have sources of foreign income that are subjected to UK taxes.
Listed above are the most common reasons you may be required to submit a personal tax return, even though you use the services of a PAYE umbrella company for your temporary assignments.
You can check if you must submit a personal tax return by completing a short survey on the government’s website.
How to register for self-assessment
Register on the government’s website before filing any paperwork if you need to submit a self-assessment tax return.
As workers using umbrella companies are employed, most of those required to submit a tax return must follow the government’s instructions for not self-employed.
You must register for self-assessment by the 5th of October if you fall within this category. For example, if you are required to submit a personal tax return for the 2023/24 tax year, you will need to register for self-assessment by the 5th of October 2024.
If you have never registered for self-assessment before, it’s easy. You can do it online.
Once you have completed the form, you should receive a Unique Tax Reference (UTR) within ten days. Using your UTR, you can then log in to your online portal and submit a self-assessment tax return.
When is the self-assessment tax deadline?
If you need to submit a self-assessment tax return, you must meet the strict deadline of the 31st of January the following year.
For example, if you need to complete a 2023/24 tax return, you will need to ensure you meet the deadline on 31st January 2025, or you will face a £100 late filing penalty.
Filing a self-assessment tax return can be stressful – especially if the concept is new to you. However, hundreds of accountants specialise in submitting tax returns accurately and within the deadline.
The pricing can be very competitive, and hiring an accountant is a popular choice amongst taxpayers. An accountant can also help you register for self-assessment, if you have problems doing so yourself. Find out more here.
Conclusion
If an umbrella company employs you, and this is the only way you receive income, you will not need to submit a personal tax return because you will be taxed at source (PAYE).
However, there are multiple reasons why you may still need to submit a tax return despite being subjected to PAYE while working for your client.
If you are unsure, you can take a quick questionnaire on the government’s website, or seek advice from an accountant.
