When the suggestion of adding a blog to Redego’s website came up in a meeting not so long ago, I thought that I would be a good-a-person as any to try my hand at writing something that could be construed as being interesting to read. I figured that a blog was simply my own explanation of a particular topic, or just my general ramblings structured into a diary-esq. format.

Umbrella Companies- what are they?

As this is my first blog post, I thought that I should begin by easing myself into it by simply writing about what exactly an umbrella company is. When I joined Redego in September 2008, I had never heard of an umbrella company, let alone considered working through one. This is often the same as many of our first-time contractors, who apply for a job, and then find out that there are two rates available to them- the PAYE rate and the limited company rate. The limited company rate will be higher than the PAYE rate, to reflect the reduced cost to the agency or end client. Many view the PAYE rate as being the safe option, but opting for the limited company rate can deliver much greater financial gain. This is where an umbrella company can help. Rather than go through the hassle and heartache of setting up your own limited company, you can simply join an Umbrella company (preferably Redego). In a nutshell, an umbrella company will act as your employer. Your agency (or client) will pay the umbrella company when you work, the umbrella company will then deduct your PAYE and NI, and pay you your net salary. You don’t have to do anything else! As your employer, you will also get a P45 when you leave and a P60 at the end of the tax year. The downside however, is that if you choose to use an umbrella company, you will become liable to pay Employers NI, as well as PAYE and NI. This is one of the key reasons why agencies will offer you a higher limited company rate.

By far the greatest benefit of using an umbrella company are the expenses that you can claim. As the umbrella company is your employer, your main place of work is your home address. Any costs that are wholly and exclusively incurred in completing your contract can be claimed as a tax deductible expense. For example, if you have to drive 50 miles to work, 50 miles back home and spend £5 on lunch, you will be able to claim a total of £45 in tax deductible expenses for every day you work (fuel is calculated at 40p per mile for the first 10k miles and 25p per mile thereafter). If you work a five day week, this means you will be able to reduce your tax burden by £225! This is the reason why many of our contractors regularly take home in excess of 75% of their gross salary!

When umbrella companies make reference to claiming expenses, they do not mean in the same way that MP’s claim expenses for the cleaning of a moat, or for an ornamental duck island. The HMRC are very strict on what constitutes a legitimate expense and so your umbrella company should be the same. All expenses need to have receipts, which must be sent to your umbrella company. While it is the umbrella company who act as your employer, if the HMRC choose to investigate you, it will be you and not your umbrella company that could end up with a large tax bill! Don’t be offended if your umbrella company asks for more proof as to the legitimacy of an expense. Redego prides itself on never having a contractor investigated by the HMRC, and if we ever do have one of our contractors investigated, we are 100% confident that everything will be in order. This is more than can be said for other umbrella companies who claim that receipts do not need to be retained. Remember that it is you and NOT them that is liable for any underpayment in tax. If you cannot prove that you have incurred an expense then you will have to pay back the tax to the HMRC. Remember that the tax man always wins!