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.

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.