Tax and accounting requirements a source of confusion. Trafalgar knowledge base articles aim to help explain the most frequently questioned topics and give you a better understanding of the value we give your business.

Knowledge Base

Contractors save money with an Umbrella Company

13 April, 2010

Umbrella Companies act as employers to agency and client contractors who work under fixed term contract assignments.

The Umbrella Company issues invoices to the agency or client and when payment is received they pay the contractor through PAYE, offsetting part of the income by claiming expenses that include travel, accommodation and meals. Umbrella Companies have become more popular since the introduction of IR35 legislation by the British government.

Umbrella Companies are governed by the HMRC, therefore earnings should not differ between Umbrella Companies, the only variances will be in the Umbrella Company fees.

An Umbrella Company should not charge you according to what you earn as there is no more work involved from their side, regardless of whether you earn £80 per day or £500 per day.

The Umbrella Company is responsible for deducting income tax and National Insurance contributions from earnings. To claim a cost as an expense you must be able to prove that it is ‘wholly and exclusively incurred in carrying out the duties of the employment’. You must obtain a receipt for each and every expense that you claim. Any other payment structure is illegal and there are no loopholes or ways around it.

Be aware that claiming expenses you have not actually incurred will land you in serious trouble if investigated by the HMRC. You would be expected to pay back all the underpaid tax, as well as a penalty usually of similar value and interest. You cannot plead ignorance, and you will not be able to excuse yourself by saying you were given bad advice.

If you are a contractor and are looking for a compliant payroll solution, give us a call today to discuss our services. We provide no-obligation advice on the best solution for you.

For a no-obligation chat call us on 020 7940 1990