Using umbrella expenses to maximise take home pay
As a recruiter you will want the best deal for the contractors that you place… So phrases such as ‘maximise your take home pay’ may catch your eye when looking to recommend an umbrella company. However, in reality, the only difference in take home pay between any umbrella company will be their margin! Oh and the levels of service that they provide. Tax is deducted as a percentage! As are national insurance contributions and HMRC determine what is and what is not allowable as umbrella expenses. So why are these claims being made??
Basically a contractor claiming an allowable expense will be able to claim tax relief on a cost that he has incurred as a direct result of the contract. The net effect of this is that the higher the expenses, the more tax relief is applied and the higher the take home-pay will be. This is all very well provided that the expenses the umbrella company puts through are actually allowable.
Scale Rate Payments
To give an example, this is an extract from an HMRC manual; “With effect from April 2009 you should no longer agree a scale rate payment for expenses incurred while staying with a friend or relative”
This statement is taken from the website of an umbrella company: “Working away from home? Staying with friends or family? Then claim £25 a night to cover food and accommodation.”
The £25.00 per night would give the contractor tax relief on £125.00 per week. He has incurred no cost as he’s been kipping on a friend’s sofa. Over a 6 month period, even for a basic rate tax payer, that equates to an underpayment of tax of £600.00. This in turn results in a very unhappy contractor when the bill arrives from HMRC.