What Expenses you can Claim through an Umbrella Company

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Contractor umbrella companies allow you to claim your business expenses even if you are caught by the IR35 tax. The contractors come under the IR35 tax can’t claim their business expense without using the umbrella company and that is the reason of huge popularity of these companies. The claiming of business expenses reduces the income tax, which results in maximum take home pay. Also, it reduces the stress of taxman as the company will cut the tax every time before sending you the payments. Different companies offer different expenses that you can claim by using their platform, depending on their fees and experience in the field. The business expenses you can claim through an umbrella company while staying under the law of UK are listed below:

Training Expenses

If you have to get some sort of training in the middle of any contract, you can ask for relief by submitting the receipts. The training should be relevant to your current contract to get the tax relief. In case, you have got a client who asks you to get training before starting the contract, still you can claim the expenses regarding your training. This can help you increase your take home pay.

Travel Charges

With an umbrella company, you can claim your traveling charges as long as you keep the receipts of bus, tube, or train expenses. The contractors who travel by car can also ask for the relief and they can get 45p relief on a mile up to 10000 miles and 25p onwards. The exact amount of expenses that you can claim may vary according to the currently applied expense costs but you will be able to claim expenses as long as you have traveled for business needs. You will need to keep receipts to ensure that there is no problem with HMRC in case they ask for receipts.

Laptop Machines and Other Equipment

The umbrella solution offers you to claim the equipment purchasing relief, which is only allowed if the equipment is required for the current contract. When it comes to cell phone or any other communication device, you can claim it if you are using the device only for the project. However, you have to be very careful not to mix up personal usage with business usage. Remember, you will need to provide receipts which will reveal the truth about your expenses.

Pensions

If you have a pension scheme and you are paying them on monthly or annual basis, you can ask for tax relief as it is fully legal and allowed by the HMRC. You can save a large amount of tax by claiming the pension funds. You can send more money to pensions fund if you are looking to save more but be sure to discuss it with your financial advisors. Some top umbrella companies will provide financial assistance and advice so that you can make the most of your time at the umbrella company.

Annual Fees

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If you have to pay any fees to a trading group, the umbrella service provider can claim it on your behalf to get the tax relief. This can help you in big way as you won’t have to worry about administrative hassle involved in such issues. Your umbrella provider will take care of all these problems for you.

Accommodation Charges

The accommodation expenses can be claimed by the umbrella company if you are working away from home due to the requirement of the contract. Also, you can claim the evening meal as it is a business expense that you don’t have to pay if you are working at home. But you can’t ask for the lunch or breakfast as you can’t claim it since it won’t be a part of your business. However, if you lunch at workplace, you can easily claim it.

Charity Donations

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The charity contributions are fully allowable against the tax as per the UK law and if you are donating some money, you must ask for tax relief.

These are the business related expenses that you can claim once you are connected with an umbrella company. At the end, you have to keep the receipts of your expenses to claim them while paying the tax.

Contractor Debate: Limited versus Umbrella Company

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It is a most common question asked by most of the contractors that “Should I work via an umbrella company or trade as a limited company? It is really hard to tell you the answer because both solutions have their own benefits and disadvantages. Actually, it depends on the situation of the contractor that what is better for him/her. Here are complete details about the Umbrella Company and limited company including the pros and cons, so that you can take a decision easily.

How a limited company works for you?

Setting a limited company allows you to keep full control over the financial matters of your business. You will be the director and as well as the accountant of the limited company. So, you have to calculate the taxes and pay them on regular basis to avoid the taxman. The limited company keeps you business finances separate from your personal finances so that your house is not on line if you have some trouble in your business. The online technology has made it really easy to run your own limited company as it is lot easier to set up your company as compare to the past.

Advantages of a Limited Company

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  1. A limited company gives you full independence over your money and the company. This means that you can control everything and reduce your tax with the help of solid strategies.
  2. As you are the boss of the company, you can make your own policies to increase you take home pay while staying under the law. At the same time, having complete control on company policies means you can modify and alter them to suit your client requirements. You can’t do this when working with an umbrella company.
  3. You can save more tax with your own limited company as compared to an umbrella solution.

Disadvantages of a Limited Company

  1. A limited company needs more time as you have to keep an eye on the financial matters to stay up to date. This also means that you have to hire financial experts to handle the problems that you are going to face every day. You will also need to hire accountants to handle tax and other problems.
  2. The contractor has to do the paper work, tax calculation, invoicing, and rest of work by himself. Majority of contractors working through limited company will end up hiring specialists for doing the paper work which means additional cost.
  3. You can’t save any tax if you come under the IR35 tax, which means no additional benefit of setting your own limited company.

How an umbrella company works for you?

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With an umbrella company, you just need to submit your timesheets to the umbrella company and the rest will be done by the professional staff of the company. The umbrella company will send the invoice to the clients and receive payments from him. They will pay the tax, cut their own fee, and rest of the money will be sent to you without any delay.

Advantages of an Umbrella Company

  1. The umbrella service provider is responsible for the administration work, which means you are completely free for your work. You can focus on your work and increase your income over time.
  2. It is very simple solution with no hassle of tax returns and managing accounts. Your umbrella will handle tax and other related issues on your behalf to leave you hassle free.
  3. It provides you more time for your work as you don’t have to waste time in the financial matters. Majority of umbrella companies will provide financial assistance through professional advisors.
  4. A good option if you come under the IR35 because you can claim the expenses, which results in low income tax and more earnings.

Disadvantages of an Umbrella Company

  1. The umbrella service provider takes a heavy sum of fees for their work
  2. You will not stay as independent as running your own limited company.
  3. Most of the companies ask you to must stay with them for a certain time period.
  4. It costs you more as compare to limited company, which results in minimum take home pay.

Umbrella Company Glossary

An umbrella company is a company that uses PAYE to process contractor payroll. Due to PAYE payroll processing, umbrella companies in the UK are able to offset business expenses against tax without getting in the way of IR35. There are various advantages of working through umbrella companies but they also reduce the control you have over your business and thus restrict you at policy-making and other administrative control.

Before you start searching for an umbrella provider or decide whether to opt for umbrella or not, you should be aware of some of the most common terms that you will read and see everywhere. We have compiled a comprehensive list of important glossary terms to ensure that you understand all details when you read something about umbrella companies.

IR35

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Contractors and freelancers used to take advantage of different loopholes in the tax system to avoid paying tax and NI contributions. IR35 was the legislation that was aimed to close those loopholes. Whether it did so successfully or not is for you to explore.

IR56

Although many contractors don’t know about IR56, it is still the most important piece of legislation concerning contractors. IR56 lays out guidelines for determining whether a person is self-employed or employed.

Dispensation

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Dispensation means the exemption from a standard rule that is otherwise necessary to follow. When it comes to umbrella companies, dispensation simply means that an umbrella company claiming dispensation don’t have to report every expense. The list of expense reports waived through dispensation is long but it contains certain daily business-related expenses. Remember, dispensation is only for a business, in this case an umbrella company, and not for the contractor who works through that umbrella company.

Indemnity

Indemnity simply means the security against a loss or a financial disaster. Umbrella companies will usually provide professional indemnity insurance to provide you a cover against such threats.

PAYE

PAYE stands for Pay As You Earn. As the name suggests, PAYE is a tax and NI payment system under which these deductions are made as soon as you earn. Umbrella companies in the UK use PAYE to deduct tax and NI contributions from contractors who are working as employee of the umbrella company.

Salary sacrifice schemes

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Salary Sacrifice means that you will sign a contract with your employer under which you will be paid only a part of your cash renumeration. The remaining compensation/renumeration will be exchanged for various benefits. These benefits vary from company to company. You should look at specific details of different packages available from different providers to examine the actual benefits that you can get by giving up certain portion of your salary.

Husband and Wife company

A husband and wife company falls under Section 660a of the UK Income and Corporation Taxes Act 1988. Such a company has two partners who are spouses. Only one of the two spouses does the work but the profits are shared between both, usually split 50/50. This practice is often associated with tax avoidance.

Limited company

A limited company offers another choice for contractors. Usually contractors with life-long commitments to contracting and large-scale business activities opt for setting up their own limited company instead of opting for umbrella company or working as a sole trader. This option provides tax efficiency and complete control over business. Working through a limited company also means that you will be a director and you will be responsible for tax and bookkeeping.

Managed Service Company (MSC)

Managed Service Company or simply MSC is a unique corporate structure where a group of contractors act as shareholders in a limited company. The affairs of the limited company are managed by the service provider, thus the name Managed Service Company. MSCs have fallen out of favor after legislation of 2006 by HMRC to discourage such companies as they were increasingly becoming a way to avoid tax.

 

Umbrella Companies – A basic guide

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It is time to start understanding the term ‘umbrella’, which is usually considered as an item that protects you from lousy British taxation laws and policies. In today’s society, it is one of the concepts, which is exceptionally thrown around, yet many of the self-employed and freelance workers are probably unaware of what the term ‘umbrella company’ means or how these perform.

An umbrella company simply brings together different freelancers and contractors underneath one body or ‘umbrella’. There are multiple reasons for contractors to join hands with an umbrella company.

Why people are showing more interest in becoming self-employed?

It is definitely a major decision to go freelance or self-employed. However, as you progress through your career, you may come to a conclusion that ‘going it alone’ sounds like a better option. People chose to become self-employed because it offers more freedom. An individual freelancer is lucky enough to switch between the days and hours, he’s willing to work. As a contractor, you will be allowed the flexibility to spend more time with your friends, family and relatives, or to simply have more time for yourself. In addition to the benefits, self-employed people are free from the frustrating restrictions of the all-empowering employer. Freelance contracting comes up with an option to move on, if you’re unhappy with the current employer. Freelance offers you a wide range of exciting opportunities, which are far better than a traditional 9-5 job. You may be working for a small firm one moment or an international company the next, meeting a large number of people and expanding your client list.

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Contactors usually work through an agency to ensure contract consistency with different employers. Normally, the agency adds you to its own in-house payroll system.  If you live quite away from where you’re being contracted, therefore you have to reclaim on expenses such as transportation allowance, then this option may suit you the most. If you’re being contracted by multiple firms or clients, you’re entitled to reclaim expenses for tax relief. In case, you’re working away from your city or place, and you’re spending more money on transport, subsistence and accommodation, this could amount to a heavy loss of income, if you’re with an agency which does not intend to calculate your deductions.

Significance of working through an umbrella company

It is quite difficult to manage the responsibility for filling in all the PAYE (Pay as you earn) and tax return by yourself which HRMC legally requires you to do. However, people with past experience in filling and accounting tax returns may tackle this moderately by themselves. Otherwise, it may take hours of your work schedule to complete all the relevant paperwork, which is the exact reason why people contract in the first place.

Umbrella companies ensure you claim back all the expenses you are entitled to either from your client’s end or recruitment agency. Contractor and umbrella company joins hands to form a unique relationship; as long you will keep providing the correct receipts of incurred expenses, umbrella company will perform all the required procedure for reclaiming. Such companies take the weigh off of you by filling necessary paperwork and administration duties on your behalf and giving you peace of mind.

Overarching employment contract with an umbrella company

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When you join an umbrella company, you sign an overarching contract of employment with the company. This contract is a special contract that covers contractors and helps them attain employment status under an umbrella company that acts as an employer. The biggest advantage of signing this contract with the umbrella company is that it brings all the different contracts that contractors signs with clients under one umbrella. Even if there is a gap between different contracts, it will still be under the same contract of employment.

The overarching contract of employment will help contractors claim various employment rights. This means that contractors will be able to claim rights such as sick pay and maternity leave. Similarly, contractors will have right to pensions and insurance. At the same time, the contract will mean that the tax and NI contributions will be deducted on earning by employer through PAYE system.

Are you facing problems choosing the right umbrella company? Here is the ultimate guide

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The most possible reason you’re reading this because you have taken the brave leap into unknown by becoming self-employed or freelancer. You know that working through an umbrella company, rather setting up a small firm, is the excellent route to follow. Now all you need to decide is, on which company you should trust. Choosing the right umbrella service can make a great difference to your working confidence by providing you sufficient information about the process of becoming an independent contractor.

If you are getting exceptionally good offers from your agency to join a particular umbrella company, don’t go for it unless you have enough information about the company. Moreover, such companies may be partnered with your agency. Usually, agencies receive a handsome commission on each referral. Here comes the need to research the broad spectrum of umbrella companies currently operating in the market.

Top tips for selecting the right umbrella company are as under:

  • You should select a company whose fee structure suits you the most. How much do they charge? Do they charge you weekly or monthly? Is there any charge on off times? Usually, there is a percentage wish is charged according to your gross earning. Fixed fee contracts are best suitable for higher earning contractors.
  • How many years has the umbrella company been operating? Do other contractors recommend the specific company you’re deciding to go with? Has it got an established client base of contractors? A well-established and reliable umbrella company with strong reviews and ratings is less likely to collapse, regulating your taxations and giving you peace of mind.

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  • Avoid signing up with companies that come up with long-term commitments with penalties for leaving early. Make sure that there isn’t any entry of an exit fee. Make sure you’re going with a top company to avoid such hidden charges.
  • There are companies operating in the market who claim ‘special’ expense dispensation, or process un-receipted expenses. Keep it in mind that HMRC insists that all expense claims should be backed up with receipts and every umbrella company must adhere to this policy. Those who are committing to process un-receipted expenses are doing it beyond the law.
  • You are paying for an umbrella service to get some benefits and therefore, it should offer you customer service of guaranteed level with help and support anytime you need it. There should be a team which is available to answer your queries 24/7.
  • Highly reputable umbrella companies offer business insurances to the willing clients or agencies. This will cover your finances if you get injured whilst on contract.

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  • You should get the information from different companies before making up your mind. You will get more knowledge about the services and offers and hence, you’ll go with the Umbrella company that best suits you. There are many scams going on in the market, so be aware of it and decide smartly.

 

Introduction to Umbrella companies

Umbrella Company is the best choice for freelancers and contractors who come under the IR35 tax. The umbrella companies got popularity after the UK government brought the new tax known as IR35 in 1999. The umbrella company provides you a lot of benefits, which are listed below along with the complete details about how an umbrella company works for you.

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An umbrella company is a great option for the new contractors or the contractors who are not sure about the time period of their contract. The umbrella company treats you as an employer and pays full tax on your behalf after calculating your tax and claims your business expenses. The umbrella company offers you full employment rights and handles all of your admin work by taking small charges. By joining an umbrella company, you can enjoy your work without any hassle of extra paper work.

How does an umbrella company analyze your payments?

An umbrella company processes your payments in various steps that are listed one by one, so that you can understand them easily.

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  1. First of all, you have to submit the timesheets and receipts of the business expenses, so it can claim it on your behalf. Remember, you have to tell the umbrella about your expenses and at the end of the day you will be responsible for that expense claim. So if you make an error and don’t provide receipt for it, you are going to be responsible for it and not the umbrella provider.
  2. The umbrella company will send invoice to the client on your behalf and receive payments. This means that you don’t have to worry about administrative hassle. You will be focusing on your work entirely and your company will handle your invoices and payments for you.
  3. After receiving the payments, they will deduct the income tax and NI contributions before sending it to you. They will also claim the business expenses to provide you relief on the income tax. This is the point where different umbrella companies offer different expenses that you can claim to reduce the tax.
  4. After paying the tax and cutting their own fee charges, they will send the remaining amount to you through available payment options. The amount will reach in your bank in a couple of days in most cases. However, some umbrella companies will provide quicker transactions ensuring that the money will reach your bank account in just a day.

How an umbrella company can help you?

An umbrella company helps you to increase your take home pay while staying under the law of the UK and paying full income tax. Every company has their different plans and they offer different benefits to their clients. With all the umbrella companies, you receive some basic benefits that are listed below to give you an idea about the umbrella company.

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  1. The first job of the umbrella company is to allow you to do your job without any hassle of administration work. This is probably one of the most interesting benefits of working with an umbrella company.
  2. An umbrella company makes sure that you are always paid for your work on time without any delay. Majority of companies will send payments on the same day as it receives from your clients or agency. Ideally, you should inquire details about payment processing in order to find a company that will send your payments on the same day.
  3. The umbrella company pays the tax and keeps the taxman away so that you don’t have to worry about tax and related problems. However, it is your responsibility to show receipts for your tax. If you fail to show receipts, you are going to face multiple problems including severe financial penalties.
  4. The umbrella company claims your expenses and maximizes your take home pay.
  5. The professional staff of the company gives you advices on the contract and helps you regarding it. Also, you get advice about the money management, which helps you in saving more money.
  6. They keep you alert regarding your deadlines, so that you never miss a deadline once you connected with an umbrella company.
  7. Most of the umbrella companies offers free insurance package, so that if company goes bankrupt, you will not face any issues regarding your payments.

 

Six Most Frequently Asked Questions about Umbrella Company

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When you start contracting in the United Kingdom, you need to have your own payroll to work as a contractor. An umbrella company provides you payroll services by acting as your employer. Contractors ask various questions about the umbrella companies to make sure that they are selecting the right path. Before joining an umbrella company, you need to read these frequently asked questions to understand the role of an umbrella company.

Why I need to join an umbrella company?

Most of the recruitment agencies ask for your own payroll to get the contract. It is a wise decision to choose an umbrella company if you are going to work with these agencies. An umbrella company behaves as an employer for contractors so that you can be on a payroll if you are attached with Umbrella Company. The umbrella company keeps things in order to let you focus on your work. They keep you alert about the deadlines so that you never miss any deadline. Also, the experienced accountants of the company advise you in financial matters and tell you about how to save more money.

What are the alternatives of an umbrella company?

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The most popular alternative of an umbrella company is setting your own limited company. By setting up a limited company, you become the director of the company and fully responsible for the financial matters including, paying tax, receiving payments, and so on. If you are a new contractor then it will be really difficult for you to manage your limited company as you have to look for new contracts, which requires a lot of time. So, an umbrella company is excellent choice for the new and short term contractors.

On the other hand, if you are going to become a full-time contractor with a large business setup, you will need to start a limited company as it will turn out to be more tax efficient. But in all other scenarios, an umbrella company will prove to be the best solution for contractors.

What are the charges of umbrella service provider?

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The charges of an umbrella company vary from company to company as per their services. You can get complete info about fee of the company by visiting its website. Every company will provide detail of its cost on its website. Even if there is no detail on the website, you will still be able to find out costs by reading details on the contract.

Can I work with different agencies using a single umbrella company?

This is the most frequently asked question by the contractors as they are want to consolidate each and everything under one roof. An umbrella company allows you to add as many agencies as you want, without any trouble, under the one same contract since the contract you sign with the umbrella company is an overarching contract of employment that covers all contracts even if they have a break between them. You just need to add the agency to your payroll once you sign a contract with that particular agency.

How long it usually take for Umbrella Company to send payments?

Most of the companies offer you to process your payments once a week except few who offer you two times a week. You can ask your company about the complete details about how long it will take to get the payments in your own bank account after sending the timesheets.

Does an umbrella company offer professional insurance?

Yes, most of the umbrella service providers offer you professional indemnity and employer’s liability insurance. Some companies also offer public liability insurance to their clients. You can ask about their insurance plan before setting up with any umbrella company.

If you are unsure about the insurance cover being offered by the company, call the customer support and ask for details. There are many fine details that you should know in order to find out the true value of the cover being offered. For example, professional indemnity has an upper limit. If that seems too small for your business, you may have to go for a separate insurance plan to meet your needs.

 

Understanding Umbrella Companies – What are common misconceptions?

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Many surveys conducted about contractors and umbrella companies in the recent couple of years have revealed various misconceptions about umbrella companies in the UK. Many contractors believe that they can claim a daily amount of subsistence irrespective of the nature of their workplace. Similarly, there are various other fundamental confusions that lead to varied opinions about umbrella companies. We have aimed to clear all these confusions so that when you are making a decision about joining an umbrella company, you know everything as it is.

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The major confusion is about the way expenses are covered and claimed through umbrella companies. This confusion is probably common due to the fact that many new and ambitious umbrella companies advertise their dispensation in a way that it leads to confusion. As a result, contractors start believing that they can increase their take home pay by claiming unprecedented expenses and a fixed amount of daily subsistence even if their workplace is only temporary.

Majority of contractors believe that these expenses are usually covered and they don’t have to worry about the nature of their workplace. They believe that these expenses are based solely on the number of hours worked through the week.

The truth about expenses and umbrella companies is that contractors can only claim expenses and subsistence if they are working from temporary workplace. According to HMRC, a contractor must incur an expense in order to claim it. Without a temporary workplace, there can’t be a travel or subsistence expense. If a contractor has a permanent workplace, then there won’t be any subsistence or travel claim even if the workplace is far away from home.

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So if you are still confused about expenses and subsistence, here is a quick list of facts that will help you clear you head. You can also read this article found on HMRC website.

  • You can only claim daily travel subsistence expense if you are working from a temporary workplace. There is no claim for permanent workplace.
  • The expenses should be incurred while performing your duties under the contract.
  • Such duties should be performed at temporary workplace to qualify for expenses.

As it is obvious from the information provided above, contractors will need to find out if their workplace is temporary or not. This will help them understand the actual expense they can claim. A workplace is considered permanent if an employee attends the place during the period of continuous work that last for 24 months or more. A workplace where you work for less than 24 months will be deemed temporary for the purpose of subsistence and travel expenses.

Is there a test to find out the true nature of workplace?

Many contractors wonder if there is a test to quickly identify the true nature of their workplace so that they don’t make the mistake of claiming subsistence from a permanent workplace. Similarly, knowing the true nature of workplace will also help contractors claim expenses and improve their take home pay.

The test for checking your eligibility for travel and subsistence is a two-fold process. First, you need to determine attendance at the workplace. If the attendance consists of the entire period of contract, than the workplace will be deemed permanent and there won’t be any relief. So to put it simply, if you are working from same workplace for the entire duration of the contract, ensuring your attendance everyday for a long period of time, then it will be deemed a permanent workplace. On the other hand, a workplace will be deemed temporary if you have worked from more than one locations for the same contract even if the contract period is more than 24 months.

However, if you are moving from one assignment to the next but for the same client and therefore operating from the same workplace, it will be deemed temporary if the duration of such contracts is below 24 months. Even though you will be going to the same workplace everyday in this case for a longer period, it will remain a temporary workplace for the purpose of HMRC. Remember, the 24 month rule will still apply but only to individual contracts.