IR35 is an employment status test determining whether a contract points towards employment or self-employment. It combats tax avoidance by closing loopholes, ensuring contractors working the same way as permanent employees pay the same taxes.

If your contract is 'inside IR35', it points towards employment. Your working arrangements are similar to those of a permanent employee, so HMRC imposes broadly the same income tax and national insurance liabilities

If your contract is 'outside IR35', it points towards self-employment, and you can enjoy the tax efficiency that self-employment brings (as well as all the associated risks).

IR35 applies on a contract-by-contract basis. For each contract, the relevant 'decision-maker' (usually the end client) prepares a Status Determination Assessment ('SDS'). The SDS looks at the engagement contract's wording and the contractor's day-to-day working practices and decides whether IR35 applies.

HMRC offer detailed guidance notes and an online tool to help decision-makers determine whether IR35 is relevant. Third parties also specialise in performing these assessments and providing insurance against a potentially incorrect determination.

Any contractor that is a UK resident for tax purposes has the potential to be impacted by IR35. Although the party responsible for performing the SDS can vary, if you are a contractor paying tax in the UK, you need to consider IR35.

This is a point that often confuses contractors. They mistakenly believe that if a potential client is overseas, then IR35 doesn't apply. Instead, they become responsible for the SDS, decide whether they are inside IR35, and hold the liability should this decision be wrong.

Umbrella companies act as employers to contractors for the length of a specific engagement, turning the self-employed into taxable employees. They employ contractors working on temporary assignments, serving as intermediaries between contractors and their clients (the end client or recruitment agency).

The role of an umbrella company is predominantly administratively focused. They manage timesheets, invoice the relevant party on behalf of the contractor, calculate and pay the required taxes and National Insurance contributions, and pay the remaining monies to the contractor (less any fees/margin for services rendered).

As contractors become employees for the time they work through an umbrella company, they are no longer subject to IR35 checks. As such, umbrella companies are the most popular choice for those required to work inside IR35. Clients often stipulate that contractors must work through an umbrella company if the contract is Inside IR35.

To calculate an employee's gross pay, umbrella companies deduct statutory employment costs and their margin from the assignment income (the amount the fee payer is invoiced). The employment costs include Employers' National Insurance contributions (NICs) and the Apprenticeship Levy . Employer's pension contributions are also deducted if applicable. Once these costs have been subtracted, you're left with your gross pay.

The margin is the only deduction retained by the umbrella company; all other deductions are made on behalf of either HMRC or a pension provider.

Claiming expenses while working through an umbrella company is virtually impossible. Since April 2016, HMRC legislation has severely restricted what expenses contractors can claim while inside IR35.

While expenses can technically still be reimbursed, you cannot offset them against your earnings like you can while working outside IR35 through a limited company. Similar to permanent employees, all expense claims must be submitted, approved by the client, and paid in addition to your regular contract income.

No umbrella company can legally process anything other than client billable expenses for tax relief purposes. Any umbrella company that actively promotes otherwise should be avoided as they are almost certainly behaving unethically.

The assignment rate is the amount the umbrella company invoices the end client. It consists of employment costs, the umbrella company's margin, and the actual wages payable to you (your gross pay).

Margin is the technical term for the fee that umbrella companies charge contractors. It's an administration fee (usually around £25 per week), covering the costs of running the payroll, insurance for the contractor, and other operational expenses involved in running a business.

The margin is commonly charged to you as a fixed weekly amount, or in some cases, it is a percentage deduction with a maximum cap based on your weekly gross agency rate (although percentage margins are rare nowadays). For example, if you become an employee of an umbrella company with a £22 per week margin, you will see a £22 deduction on your weekly payslip.

Umbrella company margins only apply when you're paid; if you are between contracts but remain on an umbrella company's books, the company will not subject you to any costs.

All UK employers, including umbrella companies, are required to make Employer's National Insurance Contributions to HMRC. As the umbrella company employs contractors but receives no benefit from the work performed, the contributions are passed to the contractor. They are calculated as 13.8% of your earnings above the Lower Earnings Limit.

The Apprenticeship Levy is a small tax levied on UK employers to fund new apprenticeships. All employers with annual pay bills of £3m or more must pay the Levy at 0.5% of the company's total wage bill, minus a fixed £15,000 yearly allowance.

For contractors, your umbrella company is your employer, and it must, by law, pay all employment taxes based on income generated by its employees. Umbrella companies pay these statutory employment costs from the funds received from your agency or end client. As the apprenticeship levy is one of these statutory costs, it will appear on your payslip alongside other statutory costs, such as the Employer's National Insurance.

As an employee of an umbrella company, you are eligible for a workplace pension. The minimum amount payable is 8% of your gross pay: 3% employer and 5% employee contributions. As employer contributions are deducted from the assignment rate, most contractors opt out of workplace pensions in favour of their salary sacrifice schemes.

A salary sacrifice pension contribution is where an umbrella worker exchanges part of their gross income to receive contributions directly into their self-invested personal pension (SIPP). This deduction is made before PAYE and NICs, making it a hugely attractive option for contractors.

As your employer, Umbrella companies must pay you a minimum wage. This 'basic pay' is calculated as the hours you have worked in each billing cycle multiplied by the National Minimum Wage.

Umbrella company employees are legally entitled to annual leave. Umbrella companies base the holiday pay their employees are entitled to on the European Working Time Regulations figure of 5.6 weeks in a year. By dividing 5.6 weeks by 46.4 weeks (the rest of the weeks in the year), you get a total of 0.1207, the percentage used to calculate annual leave. 12.07% is multiplied by Gross Taxable Pay to get the holiday pay amount.

As opposed to permanent employees, umbrella workers' holiday pay is considered when negotiating an assignment rate, it is not added on top. In other words, there is no uplift on top of pay.

There are two main methods by which you can receive your holiday pay as an umbrella company contractor:

• Advanced Payment: The umbrella company adds your holiday pay to your regular payslip, meaning you're always up to date with your holiday pay entitlement. This option is the most preferred solution amongst umbrella company employees.
• Accrual Method: The umbrella company sets aside your holiday pay until you decide to take annual leave or when you leave the company.

If 'Accrual Method' is selected, holiday pay will be deducted during the calculation of take-home pay as the contractor will not receive this money as part of their regular payslip. It is reserved until holiday is taken or the contract finishes. Holiday pay is added back when calculating total capital to ensure an accurate representation of the overall financial gain.

The final element in an umbrella company calculation is commission (or bonus). It is calculated as anything owed to the contractor above the basic pay and holiday pay. It acts as a balancing figure between these two pay elements and total taxable income.

Like permanent employees, umbrella companies pay the contractor's wages via PAYE. The required tax and NICs are made at source and paid directly to HMRC.

All employees must pay NICs on their taxable income, calculated as 12% of earnings above the primary threshold, up to and including the upper earnings limit, and 2% after that. It's important to note that this is in addition to the Employer's NICs already deducted from the assignment income.

If applicable, contractors employed by an umbrella company will make student loan repayments via PAYE, just like traditional employees.