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Maximum take-home pay for Contractors

16 September, 2010

As a service provider an Umbrella Company’s role is to ensure that contractors are paid on time, to manage deductions and to control what can and cannot be claimed for.

Working through an Umbrella Company, the contractor becomes the employee and the Umbrella Company the employer, and therefore is responsible for processing expense claims for its contractors, ensuring that all claims are acceptable under HMRC rules.

A word of caution - Umbrella Companies are basically all the same, and none can offer any more take-home pay than the other, as they all fall under the same legal framework and they are all subjected to the same tax laws. All UK Umbrella Companies operate through PAYE. National Insurance contributions are deducted as a percentage of earnings and this percentage is identical for all companies.

Some companies claim to have dispensations and encourage contractors to claim for un-receipted expenses, but this is a particularly dangerous practice and a good Umbrella Company will claim only for genuine expenses and require that all receipts are kept regardless of any dispensation. Umbrella Company employees are entitled to claim tax relief on expenses incurred in the course of the contract. These include undertaking travel, subsistence and overnight expenses. The HMRC requires that receipts are kept for 5 years.

The only variance between Umbrella Companies is the difference in their fees. There are no special expenses dispensations given to Umbrella Companies by the HMRC. The dispensations are aimed at cutting down administration work and not for providing bonus payments to contractors.

Valid business expenses include:

  • Accommodation expenses when away from home on contract
  • Meal allowance if away from your normal place of work
  • Subsistence allowances
  • Travel expenses i.e. mileage allowance and parking fees
  • Telephone costs related to business only
  • Executive pension fund contributions
  • Professional subscriptions
  • Computer equipment if the contract specifically requires it
  • Training courses directly related to the contract
  • Eye tests

Before submitting expenses that are not defined in the above categories, it is best to check with your Umbrella Company. With regard to  IR35, this only applies to anyone working as a Limited Company - employees of an Umbrella Company are not affect by IR35.

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