Favourite Umbrella Companies
Many people have their favourite umbrella companies. That’s especially true for agencies who tend to only include those umbrella companies on their Preferred Supplier List who give them bungs for sending contractors their way.
The 2010 Bribery Act bans this but it happens.
However, that’s another story.
So, what constitutes a favourite umbrella company?
Dodgy Umbrella Companies
Firstly, one that doesn’t try to con you in the contract.
Make sure you read the contract and if you see any clause detailing any penalties for leaving the umbrella company, run a mile.
If they are being sneaky and duplicitous in the beginning that’s because they are, well, sneaky and duplicitous.
If you go with that umbrella company you really have started off on the wrong foot.
Umbrella Company Recommended by Agency
So, should you go with the umbrella company recommended by your agency?
You would if you were an idiot.
There’s almost certainly one reason, and only one reason, that your agency are recommending a particular umbrella company to you and that is that they expect to get a fee from the umbrella company for every contractor that they send them.
What about that then?
Too many contractors think of their agency as their agents, e.g. like the Mr. Ten Percents in the Acting and Football professions, who look after their clients’ interests.
Nothing could be further from the truth.
‘Your agent’ wants to extract as much money as he, or she, can from you. If they can possibly take half of the rate that is paid by the client for you then they would happily take it without any scruples.
Umbrella Company Preferred Supplier Lists
If your agency demand that you use a particular umbrella company, or an umbrella company on their Preferred Supplier List, you should refuse to do so.
If they tell you that you have to, ask them to put that in writing and see how they react.
It is illegal under the 2010 Bribery Act for agencies to induce contractors to join a particular umbrella company for a fee.
Don’t worry about standing up to them.
They won’t dump you. The main fee you get for them is the margin they get on your weekly earnings.
The bung the umbrella company give them is just a bit extra on the side.
They are not going to reject the main course for a little dessert.
Your Favourite Umbrella Companies
Your favourite umbrella companies should pay you weekly and pay you on receipt of your timesheets.
Certainly run a mile from an umbrella company who say “we’ll pay you when we get paid” or make you wait for payment.
Many umbrella companies pay you straight away so use one of them.
Umbrella Company Fees
Before you join an umbrella company, examine the fees they charge and what you get for that.
Don’t necessarily go for the cheapest. Go for the best service at the best price. Look at what they are throwing in.
See, if they throw in are any insurances like Professional Indemnity Insurance.
They can purchase these insurances in bulk so they can get them for you more cheaply than if you applied for the insurances yourself.
Tax Deductible Umbrella Company Expenses
One thing that is very important, if they are to be among your favourite umbrella companies, is to find out of they’ll help you to claim expenses as tax-deductible – and what expenses you can claim.
You can more than cover the cost of your umbrella company fees by setting expenses off against tax.
Umbrella Company contractors already pay an average of £10,000 a year more in tax and national insurance contributions than a personal service company contractor does.
Don’t make it even worse by not offsetting your expenses against tax.
Umbrella Company Contractors Who Don’t Claim Expenses
I was astonished to find that between 50% and 60% of umbrella company contractors don’t claim any expenses at all.
That would increase the tax differential between umbrella company contractors and personal service company contractors to perhaps £15,000.
Soon you’ll be talking real money.
Travel and Subsistence Expenses
From April 2016, umbrella company contractors are longer be able to offset travel and subsistence expenses against tax if they are Supervised, Controlled and Directed by their client when working for them.
It would be relatively easy for you to change your contract and working practices to make it so that you aren’t Supervised, Controlled and Directed by the client.
If the client previously gave you a piece of work, told you how long it should take and told you how to do it, supervised you doing it and where you should do it, negotiate a change in the contract and working practice here.
Supervision, Direction and Control
You are an experienced contractor.
Agree the piece of work to be delivered by the client and get the agreement signed off. Do the same with the estimate for the project. Agree that and get the agreement signed off. Agree where it is best done, at your home office or at the client’s site and document that agreement.
You surely don’t need to be supervised in doing the task. When the task is delivered ask your customer to give you a signed acceptance on what you have delivered to them.
If your umbrella company won’t give you advice on how to get these expenses offset against tax after April 2016 it may be because they don’t want you to be Unsupervised, Uncontrolled and Undirected.
They may not want not to change your contract to reflect your new way of working.
Why, would they not want to do this?
One good reason, from their point of view, is that Supervision, Control and Direction is one of the three major planks of IR35.
The other two major planks are the Right of Supervision and Mutuality of Obligations, i.e. the obligation for them to pay you for turning up and for them to pay you whether there is work for you or not.
If you are able to get outside the first plank of IR35, i.e. Supervision, Direction and Control, and you enter a Right of Substitution clause in your contract, then you are only a very short step away from being outside IR35 altogether – and not have to lose all that money each year by being in an umbrella company.
Maybe that’s why many umbrella companies are not too bothered about their contractors not claiming any expenses at all against tax.
Onshore or Offshore Umbrella Companies
Of course, the favourite umbrella companies for contractors could be either onshore ones or offshore umbrella companies.
The average IT Contractor earns £425 a day. That equates to around £100,000 a year once you take out time off.
An onshore PAYE umbrella company contractor would keep somewhere between £60,000 and £65,000 in tax and NI contributions.
An offshore umbrella company contractor would keep somewhere between 85% and 90%, depending on circumstances, mostly on what they earn.
Umbrella Company Alternatives
So, the offshore umbrella company contractor could be keeping as much as £40,000 more than an onshore umbrella company contractor – particularly one who doesn’t claim any expenses.
Other alternatives to onshore umbrella companies include Tax Efficient Limited Companies for Contractors.
Both return £85% or more to contractors.