Ltd Company VS. Umbrella
Discussion
I'm sure this has been done to death but as a sanity check (and I'm sure all circumstances are different) I'd like some assistance if possible.
I have worked for my current workplace for 9 Months via a recruitment agent.
I have been using an umbrella company since the start but they are going to cease trading. The umbrella company I use is part of the recruitment company.
I only have 1 place of work across multiple offices.
I currently retain around 72% of my day rate.
Is it worth me switching to a new umbrella or worth me setting up by myself.
I like using an umbrella as it is a no fuss option but as I now need to change I would like to explore the possibility if it is "worth" setting up alone.
Thanks
I have worked for my current workplace for 9 Months via a recruitment agent.
I have been using an umbrella company since the start but they are going to cease trading. The umbrella company I use is part of the recruitment company.
I only have 1 place of work across multiple offices.
I currently retain around 72% of my day rate.
Is it worth me switching to a new umbrella or worth me setting up by myself.
I like using an umbrella as it is a no fuss option but as I now need to change I would like to explore the possibility if it is "worth" setting up alone.
Thanks
sc0tt said:
Eric Mc said:
Reading the writing on the wall for this particular type of scheme perhaps?
Sorry Eric - Not sure I understand.I looked at umbrella or own ltd and went down the latter route. Not especially difficult to set it all up and I took the easy route and got an accountancy company to set it all up for me... Plenty of questions I didn't know I needed to ask, so that was the safest route I felt.
A few of the contractors where I am currently go via umbrellas, not heard anything from them about upcoming changes as yet.
No one I've recently worked with is doing the offshore umbrella/own company loan based shenanigans (I won't admit to fully understand how that works, but it seems reasonable that HMRC would get a little sniffy at it).
I set it all up via SJD and they've been very helpful; no other link than a content client... not the cheapest by any means, and there are plenty of other companies out there doing the same.
A few of the contractors where I am currently go via umbrellas, not heard anything from them about upcoming changes as yet.
No one I've recently worked with is doing the offshore umbrella/own company loan based shenanigans (I won't admit to fully understand how that works, but it seems reasonable that HMRC would get a little sniffy at it).
I set it all up via SJD and they've been very helpful; no other link than a content client... not the cheapest by any means, and there are plenty of other companies out there doing the same.
Eric Mc said:
That and other changes that may happen in the near future. Essentially, HMRC are totally fed up with what they perceive to be "disguised employment" situations and want to put an end to all these schemes for once and for all.
How on earth is contracting via an umbrella disguised employment? I work this way, employed by the umbrella company, and pay tax and NI via PAYE. Why should HMRC be fed up with me paying the same tax and NI as a permanent employee?It would be more accurate to say that HMRC have a vindictive hatred of IT contractors, even where we gain no tax advantages at all from our situation they would prefer us to be sitting at home unemployed and paying no tax at all.
Dr Jekyll said:
How on earth is contracting via an umbrella disguised employment? I work this way, employed by the umbrella company, and pay tax and NI via PAYE. Why should HMRC be fed up with me paying the same tax and NI as a permanent employee?
It would be more accurate to say that HMRC have a vindictive hatred of IT contractors, even where we gain no tax advantages at all from our situation they would prefer us to be sitting at home unemployed and paying no tax at all.
It depends on how the tax and NI situation is handled by the "umbrellas". If they act as an employment agency, then you are correct, you are just an agency employee and will be paying tax and NI like any employee would,It would be more accurate to say that HMRC have a vindictive hatred of IT contractors, even where we gain no tax advantages at all from our situation they would prefer us to be sitting at home unemployed and paying no tax at all.
However some umbrellas have been far more radical in the schemes they have processed payment to their agency staff and in those situations HMRC will definitely look on the situation as an attempt to hide an actual "employment" situation.
HMRC has proposed to remove the PAYE and NI reliefs for expenses paid in lieu of salary, which effectively destroys many of the umbrella employment models.
Individuals paid in this way will still be able to claim tax relief for genuine expenses via self assessment, but the employer and employee NI will be payable on the full amount of the salary + expenses, which slashes the umbrella's profit margin and competitiveness.
Scale rate expenses will still be available and exempted from taxable /NICable income in a similar way to now, but not where they are being paid in lieu of salary.
Individuals paid in this way will still be able to claim tax relief for genuine expenses via self assessment, but the employer and employee NI will be payable on the full amount of the salary + expenses, which slashes the umbrella's profit margin and competitiveness.
Scale rate expenses will still be available and exempted from taxable /NICable income in a similar way to now, but not where they are being paid in lieu of salary.
schmunk said:
HMRC has proposed to remove the PAYE and NI reliefs for expenses paid in lieu of salary, which effectively destroys many of the umbrella employment models.
Individuals paid in this way will still be able to claim tax relief for genuine expenses via self assessment, but the employer and employee NI will be payable on the full amount of the salary + expenses, which slashes the umbrella's profit margin and competitiveness.
Scale rate expenses will still be available and exempted from taxable /NICable income in a similar way to now, but not where they are being paid in lieu of salary.
So how does that affect this situation?Individuals paid in this way will still be able to claim tax relief for genuine expenses via self assessment, but the employer and employee NI will be payable on the full amount of the salary + expenses, which slashes the umbrella's profit margin and competitiveness.
Scale rate expenses will still be available and exempted from taxable /NICable income in a similar way to now, but not where they are being paid in lieu of salary.
I get paid say £1000 by the client. The umbrella takes their fee, leaving £975. Then hands my expenses over to me, leaving say £800. I'm left with a salary payment of £700, minus tax and employees NI, and the other £100 is employers NI.
Does this constitute being paid in lieu of salary?
The fee charged by the umbrella may not constitute a valid expense of the employee because HMRC will not deem it to be an expense incurred "wholly, exclusively and NECESSARILY as part of their duties as an employee".
Therefore, in the example you give, the whole amount of £1,000 will be subject to Income Tax and NI.
Therefore, in the example you give, the whole amount of £1,000 will be subject to Income Tax and NI.
Eric Mc said:
That and other changes that may happen in the near future. Essentially, HMRC are totally fed up with what they perceive to be "disguised employment" situations and want to put an end to all these schemes for once and for all.
And seem quite happy to take out legitimate small businesses at the same time.TX.
Eric Mc said:
The fee charged by the umbrella may not constitute a valid expense of the employee because HMRC will not deem it to be an expense incurred "wholly, exclusively and NECESSARILY as part of their duties as an employee".
Therefore, in the example you give, the whole amount of £1,000 will be subject to Income Tax and NI.
I'm an employee of the umbrella company so they are hardly going to do the paperwork for free. If it wasn't necessary why would use an umbrella?Therefore, in the example you give, the whole amount of £1,000 will be subject to Income Tax and NI.
Also whereas an IT 'Consultancy' can send their employees on a short term assignment and regard mileage and hotel bills as an allowable expense, but if I go to do the same thing I can't?
Dr Jekyll said:
Eric Mc said:
The fee charged by the umbrella may not constitute a valid expense of the employee because HMRC will not deem it to be an expense incurred "wholly, exclusively and NECESSARILY as part of their duties as an employee".
Therefore, in the example you give, the whole amount of £1,000 will be subject to Income Tax and NI.
I'm an employee of the umbrella company so they are hardly going to do the paperwork for free. If it wasn't necessary why would use an umbrella?Therefore, in the example you give, the whole amount of £1,000 will be subject to Income Tax and NI.
Also whereas an IT 'Consultancy' can send their employees on a short term assignment and regard mileage and hotel bills as an allowable expense, but if I go to do the same thing I can't?
Umbrellas agree a Gross Amount with the candidate and then start charging their employees directly. It seems an awfully "arse about face" way of doing things.
And I would seriously question that the amounts they charge are purely to cover admin costs.
Traditionally, agencies charged the businesses they found staff for, rather than the charging the staff themselves. I bet many umbrellas do both.
Eric Mc said:
I have never worked for an employer who charged my directly for administering my employment. Of course, the gross salary that would have been agreed between me and them at the time of the engagement would have, if they were managing their business properly, factored in the admin cost of looking after staff.
Umbrellas agree a Gross Amount and then start charging their employees directly. It seems an alwfilly "arse about face" way of doing things.
And I would seriously question that the amounts they charge are purely to cover admin costs.
Traditionally, agencies charged the businesses they found staff for, rather than the charging the staff themselves. I bet many umbrellas do both.
The umbrella in this instance is doing basically the same paperwork that would be required if I was an employee of my own company, I'm sure accountancy fees would be charged in that case.Umbrellas agree a Gross Amount and then start charging their employees directly. It seems an alwfilly "arse about face" way of doing things.
And I would seriously question that the amounts they charge are purely to cover admin costs.
Traditionally, agencies charged the businesses they found staff for, rather than the charging the staff themselves. I bet many umbrellas do both.
The umbrella does not 'agree a gross amount then charge'. They charge, full stop, just as an accountant would. In fact the same firm offers accountancy for Ltd companies alongside their umbrella service, they are just alternative ways of doing the same thing.
As for the amount being purely to cover admin, of course not, obviously they make a profit on top. I'm sure even you work for money. If the fee was excessive, I would use another umbrella company.
Eric Mc said:
But the point is, you are an employee. The rules for allowing the deductabilty for employees are much more restrictive than those who run their own businesses. HMRC has a very strong case for disallowing any charges that YOU pay to the umbrella company.
So what exactly am I supposed to do? If I set up my own Ltd company and became an employee of that accountancy charges would presumably be deductible so what's the practical difference? It's also debateable whether I pay it, any more than I pay the cut of the agency who found the assignment. Or perhaps I should be taxed on that as well?First of all the argument was that contractors setting up their own Ltd companies were obviously doing it as a tax dodge. So I use an umbrella, take no dividends, can't take advantage of flat rate VAT, and I'm still in the wrong.
Dr Jekyll said:
Eric Mc said:
But the point is, you are an employee. The rules for allowing the deductabilty for employees are much more restrictive than those who run their own businesses. HMRC has a very strong case for disallowing any charges that YOU pay to the umbrella company.
So what exactly am I supposed to do? If I set up my own Ltd company and became an employee of that accountancy charges would presumably be deductible so what's the practical difference? It's also debateable whether I pay it, any more than I pay the cut of the agency who found the assignment. Or perhaps I should be taxed on that as well?First of all the argument was that contractors setting up their own Ltd companies were obviously doing it as a tax dodge. So I use an umbrella, take no dividends, can't take advantage of flat rate VAT, and I'm still in the wrong.
If, on the other hand, the engagement is in the nature of an employment, i.e. is a GENUINE employment (full time, part time, through an agency or an umbrella - it doesn't matter which) then such costs are NOT allowable.
If you are operating through a limited company, partnership or LLP (what HMRC refers to as an "intermediary") and the engagement falls within IR35, then these costs are also not allowable on the basis that if IR35 applies, this means the engagement is really in the nature of an employment.
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