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, there are many circumstances where temporary workers using umbrellas are still required to complete a tax return and pay additional tax and national insurance to HMRC.
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 the services of umbrella companies – especially as a result of 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.
These deductions include income tax, employee’s national insurance contributions, the employment costs (apprenticeship levy and employer’s national insurance contributions), and additional deductions that may apply, such as student loan repayments and pension contributions.
If a worker’s only source of income is via the assignments they’re working on and being paid for by an umbrella, 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 personal tax return and submit it for the appropriate tax year.
When would an umbrella company employee be required to submit a personal tax return?
If your only income in a tax year (6th of April to the 5th of April) 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 and have 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 £100,000.
- You have income from trusts and settlements.
- You have claimed over £2,5000 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.
- You receive child benefits with your partner, and your adjusted income (net) exceeds £50,000. See our article on the High-Income Child Benefit Charge, and how it affects millions of people.
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 need to submit a personal tax return by completing a short survey on the government’s website.
Registering for self-assessment
Those required to submit a self-assessment tax return must register on the government’s website before filing any paperwork. As workers using umbrella companies are employed, most of those required to submit a tax return will need to follow the government’s instructions for not self-employed.
You will need to 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 2021/22 tax year, you will need to register for self-assessment by the 5th of October 2022.
If you have never registered for self-assessment before, it’s an easy process, and you will need to complete form SA1, either online or by post. Once you have completed the form, you should receive a Unique Tax Reference (UTR) within ten days, and you will need this to log in to your online portal and activate your desire to submit a self-assessment tax return.
If you register for self-assessment as a self-employed worker or sole trader, or partner or partnership, the process is different. Self-employed and sole traders will need to create a business tax account by the 5th of October in your business’s second tax year, or you could be fined.
Partners or partnerships must register for self-assessment online by the 5th of October (for the previous tax year). However, the partnership must be registered first, and a nominated partner can do this on the government’s website. It is worth noting that there are different ways to register a partnership depending on whether it’s a limited liability partnership, or a company or trust (you’re a partner who isn’t an individual).
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 2021/22 tax return, you will need to ensure you meet the deadline on 31st January 2023, or you will face a £100 late filing penalty.
Filing a self-assessment tax return can be pretty 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.
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 a professional accountant.