Keep More of Your Income

Keep More

Keep More of Your Income

You can keep more of your income, i.e. 85% or more using one of three methods:-

Tax Efficient Umbrella Companies

There are both onshore and offshore umbrella companies. Using the standard onshore one will mean that you lose 40% or more of the money you earn.

This could be even more, however, after the Chancellor ruling that umbrella contractors can no longer offset travel & subsistence against tax.

One way to get around this was to use an offshore umbrella company. Another way is to use a more tax efficient onshore one. That’s so you can keep 85% of your money with one of those.

To lean more click on Umbrella Companies

Tax Efficient Limited Companies

The majority of IT Contractors use Limited Companies. These are termed Personal Service Companies when one person earns most of the income in the company.

However, most freelancers don’t use their companies in the most tax efficient way.

They could retain 85% of the money they earn and more if they optimised its use.

So, to find out more click on Limited Companies

Apply for More Information on Both Options

Fill in the form below to get your information pack on how the above three work. Click Y against each of those options for which you want to receive the Infopack.

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    Favourite Umbrella Companies for UK Contractors

    Favourite Umbrella Companies

    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.

    Umbrella Company Recommendations for UK Contractors

    Umbrella Company Recommendations for UK Contractors

    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.

    Umbrella Company Costs

    Umbrella Company Costs for UK contractors

    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.

    Umbrella Company Fees and charges

    Umbrella Company Fees and charges for using them

    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.

    Umbrella Company Comparison

    Umbrella Company Comparison for UK contractors

    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.

    Outside IR35

    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.

    IR35 and UK Contractors - Inside or Otsideu

    IR35 and UK Contractors and the tax they pay

    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.

    Offshore Schemes for UK contractors to save tax

    Offshore Schemes for UK contractors to save tax

    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.

    Expenses Umbrella Company Contractors Don’t Claim

    Expenses Umbella Company Contractors Don't Claim

    Expenses Umbrella Company Contractors Should Claim

    There are quite a few expenses umbrella company contractors should claim but don’t.

    Chancellor Osborne stated in his Autumn Statement 2015 that he was going to take away the right of umbrella company contractors to claim travel and subsistence expenses against tax if they were under the supervision, direction and control of their clients.

    It was immediately thought that this could be a complete game changer for umbrella companies and their owners. It was thought that it could be an existential threat to them.

    After all, if contractors will pay a monthly fee greater than what they are able to get back in tax deductions then surely there was no point in them staying in the umbrella company.

    Working through Umbrella Companies

    Working through Umbrella Companies for maximum returns

    Umbrella Company Contractors Don’t Claim Expenses

    However, figures from giant group showed that 60% of the contractors in their umbrella company don’t bother claiming any expenses at all.

    So the Chancellor shutting down the travel and subsistence expenses wouldn’t affect them at all.

    Many of them probably don’t even know that it has happened. When April comes they will probably be oblivious to it.

    So, for what could they have been claiming?

    Allowable Umbrella Company Expense Claims

    For a start, everyone travels to work so they could have been getting 45p a mile deductible for the first 10,000 miles and 25p thereafter.

    If you are giving someone from an umbrella company a lift to work you can claim another 5p a mile for them.

    Your parking fees are claimable as are any toll charges.

    If you take the train or bus to work (or even aeroplane), you can claim the full cost back in tax.

    Umbrella Company Expenses

    Umbrella Company Expenses explained

    No Travel and Subsistence After April

    This is going to go in April for those who are supervised, directed and controlled. However, why do so many current umbrella company contractors not claim for any of this?

    Surely, they don’t all live in walking distance of work.

    Then there are subsistence expenses.

    If you are working away from home you can claim the cost of hotels and meals.

    You can also claim for rented accommodation although not for food. They reckon that you would probably eat anyway.

    If you do any extra work and have to eat then you can claim it too.

    Expenses Deducted from Wages Before Tax

    All expenses are deducted from your ‘wages’ before tax is calculated.

    However, 60% of giant’s contractors don’t.

    giant are not unusual other umbrella companies tell me that more than half their contractors don’t claim any expenses.

    All of the above are about to go in April for those who are supervised, directed and controlled at their client’s site.

    However, it is strange that so few umbrella company contractors claimed them in the first place.

    Maybe they couldn’t claim subsistence as they were not working away from home. However, everybody has to travel into work.

    As the umbrella company deducts  your tax and NI contributions from your salary before  it ia calculated, it could be money saved at the higher rate of tax.

    Umbrella Company Costs

    Umbrella Company Costs for UK contractors

    Other Expenses Claimable by Umbrella Companies

    So, what else can they claim.

    They can claim for postage, stationery and phone calls related to their work

    Also, they can claim for equipment like PCs and printers etc. that they use on their assignment

    They can claim for fees paid as membership of trade bodies like contractors group IPSE

    Again, they can claim for training costs and even the cost of eye tests and glasses.

    A significant saving is tax-deductible for a pension scheme. Do they not claim for that?

    Maybe the umbrella company has a pension scheme and claims for them but I don’t know.

    Even the umbrella company’s fees are tax-deductible.

    Maybe the umbrella company claims that for them automatically – but maybe they don’t. I don’t know.

    Put in Umbrella Companies by Agencies

    It just seems very strange that so many contractors could cut their tax bill but don’t.

    Perhaps they just don’t know any better.

    Maybe when they came into contracting they were edged towards an umbrella company by an agency who get bungs from umbrella companies for sending contractors to them.

    Perhaps they have just remained in those umbrella companies ever since.

    Contractor Tax Advice

    Contractor Tax Advice on umbrella company alternatives

    Umbrella Company Contractors Outside IR35

    It could even be that they are outside IR35 and able to use a personal service company but don’t know it.

    The difference in tax paid by an IT Contractor earning £425 a day, or £100,000 a year is currently around £10,000 a year.

    When the ability to claim for travel and subsistence expenses goes in April 2016 that could rise to £15,000 a year.

    With the gap rising umbrella company contractors who do claim travel and subsistence expenses against tax may look at alternatives to umbrella companies.

    Umbrella Company Alternatives for Contractors

    They could sue a plain old personal service company which could save them £15,000 a year in tax and NI contributions.

    Also, they could use a tax efficient Limited Company Solution which would save them £25,000, or more, a year.

    They could also use an Offshore Umbrella Company which would save them £25,000 to £30,000 a year.

    Tax Efficient Limited Partnerships

    Tax Efficient Limited Partnerships for UK contractors

    Umbrella Company Contractors Who Don’t Claim Expenses

    However, as regards the 60% of umbrella company contractors who don’t even bother to claim expenses, one presumes that they will carry on regardless, oblivious to it all.

    There are many expenses that umbrella company contractors could claim but don’t.

    Over a period of ten years they may pay a quarter of a million more in tax than they need to.

    Invested properly over a ten-year period that could easily be turned into half a million.

    Perhaps a new term could be coined for those contractors, who, after all, are permanent employees of their umbrella companies for tax purposes.

    Maybe they could be called semi-perms.

    Umbrella Companies Dilemma over Supervision, Direction and Control

    umbrella companies dilemma on supervision, direction and control

    Umbrella Companies Dilemma

    The Chancellor Osborne’s Autumn Statement and 2016 Finance Bill has caused a huge umbrella companies dilemma.

    The Chancellor has said that all Umbrella Company contractors will be deemed to be under the Supervision, Control and Direction of their clients – unless it can be proved otherwise.

    This would mean that they are no longer able to offset travel and subsistence expenses against tax.

    As this is the main expense that umbrella companies can claim for their contractors, it means that their contractors are going to take a huge hit in their pockets.

    Umbrella Companies will have to tell contractors this before April and before they notice a huge chunk mission from the money returned to them.

    Umbrella Company Expenses

    Umbrella Company Expenses explained

    Leaving Umbrella Companies or Staying

    It will also mean that many of those contractors will have a decision to make, whether to stay with their brolly or to take themselves out of IR35 and use a personal service company.

    Some contractors will stay and some will go.

    They have to pay upwards of £100 a month to umbrella companies, basically just to pay them.

    This was offset by what they would save on an Accountant and even more by what the umbrella company could offset in taxes for them.

    What they gained was more than they paid out to the umbrella company.

    So, it was worthwhile for them to stay in the umbrella company rather than pay the IR35 tax.

    Autumn Statement and Finance Bill

    However, that situation has now changed after the Autumn Statement and Finance Bill 2016.

    The main expense they could offset against tax was the travel and subsistence expenses.

    That will be gone from April 2016.

    So, many umbrella company contractors will now be paying the umbrella companies more than they are saving in tax.

    The contractors will have a decision to make and so do the umbrella companies.

    Umbrella Company News UK Contractors need

    Umbrella Company News for UK contractors

    Changing the Contract for SDC

    However, the brollies will now have a dilemma.

    Should the umbrella companies try to take contractors outside the Supervision, Direction and Control of clients?

    In terms of the contract this should not be too hard to do.

    The contract would say that for any task, or piece of work, the client would have to agree this with the contractor.

    They would have to agree the estimate too.

    Employers tell permanent workers what to do and how long it should take. Suppliers, with a contract for services, would agree with their customer what should be delivered and when.

    Changing Contractors Working Practices

    As I said, it would be easy enough to change contracts to reflect this. After all, umbrella companies normally have a cosy relationship with agencies who supply them with contractors.

    Providing the client is reasonable, and most are, they would be happy to change the contractor’s working practice to match the contract.

    Both parties would agree the piece of work,  as would the estimate. The contractor would complete the task unsupervised, using his, or her, own knowledge and experience.

    Of course, they are taking a bit of a risk. If they got it wrong they could get hit for the missing tax.

    However, theres is no reason to get it wrong,

    It’s fairly simple. The contract HAS changed. The relationship between the contractor and the client HAS changed to a customer / supplier relationship in terms of agreeing what has to be delivered and the time it should take.

    So, it is not fraudulent. It is just a fact – a change way of working.

    Working through Umbrella Companies

    Working through Umbrella Companies for maximum returns

    Umbrella Company Options and Choice

    So, here’s the umbrella companies dilemma.

    Here is their Catch-22.

    If they do help the contractor to be unsupervised, working without direction and uncontrolled by the client, this would get the contractor his travel and subsistence expenses back again.

    That might save him, or her, £5,000 a year.

    It might make it more worthwhile to stay with the umbrella company.

    Contractor Now Outside IR35

    However, it would also take him, or her, closer to being outside of IR35.

    This would mean that he, or she, could now work through a personal service company.

    Personal service company contractors pay an average of £10,000 a year less in tax than an umbrella company contractor.

    There are three main IR35 factors which point to you being caught by IR35 or outside it.

    Major IR35 Factors

    They are:-

    1 Supervision, Direction and Control

    2 The Right of Substitution

    3 Mutuality of Obligation

    IR35 and UK Contractors - Inside or Otsideu

    IR35 and UK Contractors and the tax they pay

    Right of Substitution Contract Clause

    We know, from a previous court case, that you can easily insert the right of substitution into your contract and a named substitute and that the burden of proof is with HMRC to prove that it was a sham.

    They could only do that if the client triggered the substitute clause and the substitute failed to show up. That court verdict must have had HMRC gnashing their teeth.

    So, of the three main pointers to IR35, putting a right of substitution clause that will never be triggered into your contract would allow you to tick that box.

    The umbrella company has just helped the contractor to be outside the Supervision, Direction and Control IR35 factor.

    So, the contractor is able to tick off two of the three main IR35 boxes.

    Keeping More of a Contractor’s Income

    He, or she, would naturally think “Maybe I can get outside IR35 and set up a personal service company so that I could save not just the £5,000 for travel and subsistence but also another £10,000 a year on top of that”.

    So, that is the umbrella companies dilemma.

    Should they arrange with the agencies and clients to change the contracts fo some of their contractors to take them outside the Supervision, Direction and Control clause?

    This would mean that they could still claim their travel and subsistence expenses which might come to more than the monthly fee that the contractor pays to the umbrella company?

    Intermediaries Rules for Contractors

    Intermediaries Rules for Contractors over IR35

    Big Question for Contractor Umbrella Companies

    The big question for them is this:-

    Will getting contractors outside Supervision, Direction and Control of the client be more likely to get umbrella companies contractors to stay with them or be more likely to show them how it is done and make it easier for them to leave the umbrella and set up a personal service company.

    That’s the 64 million dollar question for umbrella companies.

    They are going to have to decide, before April, whether they are going to open that box or keep it shut.

    They are going to have to decide whether to twist or stick.

    That is the umbrella companies dilemma and they need an answer to it well before April.

    So, what will they do?

    I’m absolutely certain which option they will take – but that is for another article.

    Umbrella Company Alternatives

    If they don’t answer it correctly, contractors could jump ship to Limited Companies or Offshore Umbrella Companies.

    Tax Efficient Limited Partnerships

    Tax Efficient Limited Partnerships for UK contractors


    Umbrella Companies Contractors Alternatives After April

    Umbrella Companies Contractors Alternatives

    Umbrella Companies Contractors Alternatives

    Are you looking for umbrella companies contractors alternatives?

    Umbrella Companies in the UK are under a severe threat that would be a severe blow to the solar plexus. It would leave 200,000 umbrella companies wondering whether it would be worthwhile staying in an umbrella company or looking for another solution.

    The Chancellor has already told us that he is going to abolish the ability of umbrella company contractors to offset travel and subsistence expenses against tax.

    Umbrella Company Recommendations for UK Contractors

    Umbrella Company Recommendations for UK Contractors

    It is mainly contractors who fear that they are inside IR35 who join umbrella companies.

    Disguised Contractors in Umbrella Companies

    The umbrella companies disguise these contractors as employees of the umbrella company and they deduct PAYE from the contractors’ income.

    In all other ways the contractor behaves like a contractor.

    The umbrella company performs no other function other than to disguise contractors as employees for tax purposes and pay them accordingly.

    They allow for tax deductions like travel and subsistence, pay the contractor and send the PAYE to the taxman.

    If contractors were to just pay the IR35 tax they would not be able to claim much in the way of tax deductions.

    Tax Deductible Travel and Subsistence Expenses

    However, using the ruse, or device, of the umbrella company, they are able to claim certain things against tax.

    These include travel and subsistence, equipment costs (e.g. their PC), pension contributions and membership fees of trade organisations.

    However, the most important of these is the travel and subsistence that they can claim as deductible.

    Conservatives Bashing Contractors Again

    However, the Conservative Government, in the guise of Chancellor George Osborne, intends taking it away from them.

    To be fair, they are also going to take it away from personal service company contractors too.

    They couldn’t be fairer than that, could they?

    Umbrella Company Contractors Monthly Fee

    Umbrella Company contractors pay a fee of normally over £100 a month for their umbrella company, basically, to pay them.

    They must be the only ‘permanent employees’ who their company charge  just to pay their salaries.

    It was worthwhile, previously, for contractors to pay that fee because they would get more back in tax-deductible allowances than their month fee.

    Doing a financial bean count they still came out on top.

    However, a financial bean count, after this, may well show that the money they are paying their umbrella company to pay them, and do their admin, is more than they are able to claim back in tax-deductible expenses.

    They may as well just pay the full  IR35 tax. It might be cheaper for them to do so.

    Contractors Staying with Umbrella Companies

    Some contractors will stay with the umbrella companies. They will be those who are happy to pay the umbrella company to do their admin for them even though they lose out financially.

    There will also be those contractors shoved unceremoniously by their unscrupulous agencies into umbrella companies, against their interests, so that the agencies can continue to get ‘bungs’ from the umbrella companies for doing so.

    Inducing contractors to join an umbrella company is illegal under the 2010 Bribery Act – but we know it happens.

    However, many contractors will be looking for alternatives to umbrella companies.

    Here are some umbrella companies contractors  alternatives worth looking at.

    Personal Service Companies (Limited Companies)

    Although the Conservatives intend to take the travel and subsistence allowance from personal service companies too, there are still lots of other tax-deductible expenses that a limited company contractor can claim.

    Indeed, it is reckoned that limited company contractors pay an average of £10,000 a year less in tax and NI contributions than an umbrella company contractor.

    So, umbrella company contractors may seek to change their contracts, and working practices, to take themselves outside of IR35.

    Many of those contractors using umbrella companies were those who weren’t sure if they were inside IR35 or outside IR35.

    They didn’t want to take the chance of an IR35 investigation which may take years and cost them tens of thousands of pounds of back tax and fines if they lost.

    However, with these changes to allowances that they can claim they may well be more willing to take a little bit more risk for more rewards.

    Tax Efficient Limited Companies

    These are similar structures to the common or garden limited companies.

    However, they manage contractors income in the most tax-efficient way to give them returns of 85% or more.

    Limited company contractors can continue to use their existing limited companies going this route.

    An example of one of those, and how they do it, is here – Tax-Efficient Limited Companies.

    Offshore Umbrella Companies

    Multi-national companies and high net worth individuals, as well s hedge funds, have long used offshore companies to save on tax.

    Now contractors are taking advantage of UK tax laws to do so too.

    They can get keep 85% or more of their income using these.

    For more information see Offshore Umbrella Companies List for UK Contractors.

    The contracting world is now very different to the one that we are used to.

    Those that plan in advance will be those who will not miss out.

    To be forewarned is to be forearmed.

    Best Financial Options for Contractors Now

    Best Financial Options for UK Contractors

    Best Financial Options for Contractors

    We look at the best financial options available for UK Contractors.

    Retention levels available for contractors

    One of the key decisions for contractors is which method to contract through.

    This impacts on the amount of your fee you actually keep after taxes, administration and accountancy.

    They have put this further into the spotlight following the changes to dividend taxation and travel and subsistence expenses for employees.

    However, these changes will have a negative impact on the amount of money that will end up in your bank account.

    So, contractors will pay extra amounts in tax and national insurance once the changes come into force.

    Below is a summary of the options available and a summary of their position for tax and the likely level of retention a contractor can expect.

    For the purposes of the article we will assume that the contractor is a single IT worker, of 40 with a standard tax code and a 12 month contract for £350 per day.

    He works 5 days per week and 48 weeks of the year (annual income of £84,000).

    This worker spends £8k per year on travel and subsistence.

    Self Employed Contractors

    There has been no significant impact to the status of a self-employed person. As before, the key obstacle is IR35 (and the rules are going to be subject to revision).

    So, a self-employed person has to pay Income Tax and class 2 and 4 National Insurance.

    Other than the deduction of expenses that relate directly to their employment, there are no commonly used methods of tax planning.

    In addition, the self-employed person has to either undertake all administration for invoicing and collection.

    Plus they also have the responsibility for making payments for tax when they fall due, or engage an accountant to do this.

    There may be a large tax bill at the end of the period to settle.

    So, the contractor here would retain 67-78% of their income.

    Limited Company Contractors

    The ability to use dividends is a key element in tax planning for those contractors who operate Limited Companies.

    Dividends are taxed at a much lower rate than salary. There is currently an effective rate after tax credit of

    1. 0% up to £31,785,
    2. 25% above this up to £150,000, and
    3. 30.56% on any earnings above £150,000.

    Going forward the removal of the tax credit on dividends will result in dividends being taxed at 10% up to £31,785.

    Although there is a £5,000 tax-free dividend allowance.

    They will tax them at 32.5% above this up to £150,000. They will aslo tax them at 37.5% on any earnings above £150,000.

    So, this change will have a huge impact on contractors that operate a Limited Company. The benefit of making drawings in the form of dividends rather than salary has been greatly reduced.

    In the 2014-15 tax year, our Limited Company contractor could retain 72.92% of their income.

    However, moving forward into the 2015-16 tax year this will drop to 65.79% due to the changes in dividend tax.

    There will, also, be costs associated and administration associated with the operation of a Limited Company.

    There will, also, potentially be the need to control invoicing and collect payments.

    Umbrella Company Contractors

    Becoming an employee of an Umbrella has been a popular method of tax planning and also reducing the administrative burden for contractors.

    The Umbrella will manage all invoicing, collection and taxation matters and pay the contractor their net fee.

    By becoming an employee of the umbrella, it enables the company to deduct travel of subsistence expenses. These are not allowable deductions of self-employed workers.

    Therefore, in the case of our contractor, using an Umbrella under current rules would provide a retention of 63.96% of their fee.

    So, going forward into the new rules for Umbrellas, the retention drops to 59.30%.

    Limited Partnerships Compliance with UK Tax Rules

    Among the rules they have ensured their compliance with are:

    1. Transfer of Assets Abroad Legislation – Chapter 2, Part 13 ITA 2007

    2. DOTAS

    3. GAAR – Section Part 5 FA 2013

    4. IR35

    5. Part 3, Chapter 7, ITEPA 2003

    6. The newly announced Onshore Intermediaries guidance, 9 July 2015

    Best Financial Options for Contractors Summary

    So for each of the four options, the expected retention after taxes and fees is as follows:

    Route                  2014-15  2015-16

    Self Employed        67.78%      67.78%

    Limited Company  72.92%  65.79%

    Umbrella                   63.96%  59.3%

    Tax Efficient Limited Company –  No less than 85%  No less than 85%

    So, choose the best financial options for you.

    Umbrella Companies Future – Do They Have One?

    Umbrella Companies Future now

    Umbrella Companies Future

    Contractors are asking, now, about Umbrella Companies future after the Chancellor’s summer budget.

    In the budget the Chancellor has taken away the ability of onshore umbrella companies to claim tax relief for contractors on travel and subsistence.

    This was the main reason for contractors, inside IR35, to be in PAYE umbrella companies.

    IR35 Tax and Contractor Umbrella Companies

    Contractor umbrella companies sprung up in 1999 when the IR35 tax came onto the statute book.

    Very few contractors actually pay the IR35 tax.

    From memory, I think that the Government only collect around £12m a year from it which is a tiny amount. It was not worth creating a tax just for that amount of money.

    However, what most contractors, who were inside IR35, did was to go into onshore umbrella companies.

    Contractors Inside IR35

    They paid more tax than their fellow contractors who were outside IR35 and continued to use limited companies.

    However, because of the travel and subsistence expenses that their umbrella companies were able to claim on their behalf, for working away from their main office, they paid less than those contractors who paid their IR35 tax.

    Estimates show that umbrella company contractors pay, on average, £10,000 a year more in tax than those who use limited companies. They pay around £20,000 a year more than those who are in offshore umbrella companies.

    Estimates show that there are 200,000 UK contractors in umbrella companies. That means that the Chancellor gets £2 billion a year more tax than he used to get if those umbrella company contractors were still in limited companies.

    Contractors group, IPSE, claimed that the IR35 tax was a failure because it only brought in £12m a year.

    However, they forgot to point out this extra £2 billion a year that the Treasury has been getting from contractors who were inside IR35 but went into an umbrella company instead of paying the IR35 tax.

    Travel and Subsistence Tax Relief

    Estimates show that they could save around 5% of their income a year on tax relief on travel and subsistence expenses.

    So, a contractor on £400 to £450 a day would save around £5,000 a year on tax and relief on travel and subsistence expenses.

    So, UK contractors are £10,000 a year worse off in an umbrella company than they would be in a limited company.

    However, they would have been £5,000 a year better off than someone paying IR35 or PAYE.

    Disguised Contractors

    How it works is that umbrella companies disguise contractors as permanent staff. Indeed, they pay PAYE.

    However, the umbrella companies passed on the tax relief for travel and subsistence expenses for working away from the umbrella company’s offices at client’s sites.

    The Labour Government set up IR35 to stamp out the practice where companies laid off people on a Friday from their permanent jobs and started again as contractors doing the same job.

    This was, of course, a ruse to save tax.

    The Government saw these ‘contractors’ as disguised employees, which, essentially, they were.

    However, the IR35 tax caught more than just those fake contractors it its net. It also caught contractors who had been contracting for years, using limited companies, in its net too.

    However, the Labour Government saw the extra money it was pulling in and decided that they didn’t want to ‘fix’ it.

    The Tories and UK Contractors

    Now, the Conservative Government, who in opposition had pretended to be the ‘friend of contractors’ and who promised to ‘look at’ IR35 again on behalf of contractors if they got elected, have shown themselves to be much worse than New Labour. They were satisfied with the their creation of IR35.

    The Conservatives did as they had promised and looked at IR35 again.

    However, they decided that, if IR35 was abolished, there was a danger that umbrella company contractors would leave their umbrella companies and start up limited companies again.

    Damn right they would have!

    Who pays £10,000 a year extra tax when they don’t have to?

    The government saw this as a bad thing, though.

    It was a no-brainer. Whoever thought that, in times of austerity and Government debt that the Government would hand back £2 billion in tax to people earning a couple of grand a week.

    Chancellor Strengthening IR35

    However, Chancellor Osborne went even further. He said that he was going to STRENGTHEN IR35 and hired 36 new IR35 Compliance Officers based in Croydon, Edinburgh and Stretford to get more tax from contractors.

    The assumption was that it was limited company contractors that he was gunning for.

    Umbrella Companies future seemed secure.

    Umbrella Company owners fondly imagined that HMRC were in favour of them.

    After all, the Government decided to keep IR35 because of the threat of contractors leaving umbrella companies and setting up limited companies.

    The Conservative Government must like Umbrella Companies then, right?

    Rosy Umbrella Companies Future

    Umbrella Companies future seemed rosy.

    Umbrella Company owners fondly imagined that HMRC, the Chancellor and the Treasury looked kindly on them.

    As one told us “HMRC would rather deal with, and legislate for, a few hundred umbrella companies rather than several hundred thousand contractors”.

    The umbrella companies extracted PAYE from their contractors after deducting tax relief on travel and subsistence expenses and sent large cheques, monthly, to HMRC.

    If those contractors were in limited companies, HMRC would only get the tax in dribs and drabs and would have to wait till well after their year-end to get it.

    Therefore, the Government and HMRC were happy to allow contractors to get that 5% extra in tax relief, weren’t they? Umbrella Company operators saw this as a sop to them.

    Onshore Umbrella Companies and Tax Avoidance

    They, and their marketing directors, saw offshore umbrella companies as tax avoidance and those who used them as tax avoiders.

    They turned their nose up at them.

    A part of that was sour grapes, though, as they would have rather have had those contractors themselves.

    They saw themselves as on the inside, on the side of right.

    It turned out that the Chancellor saw Umbrella companies as tax avoidance too and those contractors who used them as tax avoiders.

    How that must have stung!

    Disguised Contractors and Tax Avoidance

    They were kidding themselves. Whereas IR35 was set up to penalise disguised employees, umbrella companies were setting up disguised contractors, pretending that contractors, who had their own clients, were employees and paying PAYE tax for them.

    It was a ruse – a device to avoid tax.

    They may not like that but that’s how the Chancellor sees them and their brollies, as the budget showed.

    Now, umbrella companies future does not look so rosy.

    Umbrella Companies Unique Selling Point

    So what is umbrella companies future?

    The Chancellor has removed their Unique Selling Point.

    Now, umbrella companies future is not rosy. It is hard to see it as a growth industry now.

    Will contractors pay a fee to umbrella companies every month just so they will do their admin for them?

    The answer is that some might.

    With umbrella companies future looking bleak, others will decide that it isn’t worth their while. They may look at changing their working practices and contracts to see if they can operate through limited companies again.

    Limited Company Contractors Attacked

    However, the Chancellor has attacked limited company contractors too and has taken the travel and subsistence tax relief away from them as well.

    He is also taxing their dividends to make it not worthwhile, any more, for limited company contractors to pay themselves in dividends rather than salary.

    So what options do UK contractor have now?

    What options has the Chancellor left untouched?

    What are the umbrella company alternatives?

    Offshore Umbrella Companies Option for UK Contractors

    Besides limited companies, which are less lucrative for contractors now, there are two main options.

    Firstly, there are offshore umbrella companies where contractors can get 85% returns on their money or more.

    For more information, or to apply, you should click on Offshore Umbrella Companies List

    UK Contractors Blackest Day Ever – Was it?

    UK Contractors Blackest Day

    UK Contractors Blackest Day Ever

    Yesterday was arguably UK Contractors blackest day ever. Only the day they set up IR35 in 1999 could rival it. IR35 did not affect the majority of UK Contractors, however, like yesterday did.

    It was the blackest, blackest day for Umbrella Companies who can no longer claim tax relief for contractors on travel and subsistence.

    Umbrella companies’ best ever day was the day IR35 came in. They sprung up after that, disguising contractors as permanent employees so that they could claim tax relief on travel and subsistence for them.

    No longer!

    Yesterday was their worst ever day and the umbrella company industry will never be the same again.

    However, the Chancellor also attacked those using limited companies. It was UK Contractors blackest day too. Read on for the impact of yesterday’s cruel budget on contractors which we got from an expert source.


    The Chancellor of the UK delivered his Summer Budget yesterday. Within this there are a number of matters that will affect contractors. So, the main changes that will have an impact are:

    · First of all, they announced a change to the taxation policy on dividends. Previously there was an advantage for those operating a Limited Company to take dividends rather than salary. This was available at a saving of up to 12.5% (on payments up to £150k).

    However, the changes in the Summer Budget mean that they will remove the Dividend Tax Credit from April 2016 and they will introduce a new Dividend Tax Allowance of £5,000 a year. New rates of tax on dividend income above the allowance will be 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.

    · Secondly, they aimed the other impact at those contractors that are the sole employee of their own company (PSCs). Previously an allowance was available for those PSCs paying employers Class 1 National Insurance on ordinary salary payments up to £2,000.

    Umbrella Companies Worst Day

    In his Budget, Mr Osborne has now removed access to this allowance for those operating PSCs.

    · First of all, a key fact of Umbrella businesses is the ability to offset expenses on travel and subsistence. This enables contractors to reduce their taxable income. It is one of the most widely adopted methods of tax planning in the contractor market.

    After first being discussed in the March 2015 Budget Plan, it was announced that this relief is to be removed with effect of April 2016.

    · Secondly, IR35 has long been a key area for both contractors and HMRC. It has been the subject of a great deal of scrutiny. Again, the Government have chosen to review this. Although no specific guidance has been given, the likelihood is that this is an area of planning that will be open to a reduced cross-section of the contractor community.


    Personal Service Companies Crackdown by Government

    Personal Service Companies Crackdown

    Personal Service Companies Crackdown by Government

    Chancellor Osborne, in his Budget today, has launched a fierce Personal Service Companies Crackdown.

    He is determined to stop contractors who use limited companies as personal service companies from claiming travel and subsistence expenses against tax.

    This personal service companies crackdown is where there is an intermediate between a contractor and a client, e.g. an umbrella company or an agency.

    This will, therefore, make it more expensive for UK Contractors to contract.

    IR35 Tax Changes

    Also, the Chancellor wants to look again at IR35 tax. He is not happy that it is working properly.

    When he says that he wants to look at IR35 again we can assume that he wants to strengthen IR35 as he promised in a previous Autumn Statement.

    So, he has already hired a 36-strong IR35 compliance team to do this.

    Limited Company Dividends

    Another area where the Chancellor has hit UK contractors is in the area of dividends.

    He has, effectively, raised the tax rates on dividends. This will be a disincentive for contractors to operate through limited companies.

    They have, traditionally, paid dividends rather than pay salaries as the tax was lower.

    Dividends were not subject to National Insurance as salaries are.

    Now that differential has been taken away with his personal service companies crackdown.

    He has hit umbrella companies, as well, He has taken away the meagre tax relief on travel and subsistence that they got. Therefore, it is now, financially, hardly worthwhile using an umbrella company now.