How an Umbrella Operation Can Help You
If you’re employed on a contract basis or pay self employed tax, you could be contributing significantly more self employed tax than you absolutely have to. By creating an umbrella company you can simplify the process through which you are rewarded for your labour, and reclaim many of your everyday costs against your tax liability.
For example, if you were a consultant contracted to an advertising company on a self employed basis, you could choose to establish an umbrella company which would be your employer on a permanent basis, and be paid for your time by the firm to which you are contracted. The umbrella company could then pay you as an employee rather than as a self employed person.
Through the umbrella company you could also, and simply, declare your day to day costs as expenses, which the umbrella company would be able to treat as operating costs, deducting them from the moneys received from the company to which you’re contracted before you are paid, and crucially, before before any sums as to your tax liability are made. The expenses that the umbrella company might be able to remove from your self employed tax in this fashion might include mileage or other travelling costs, your computer and internet usage at home if you have a home office. You could also choose to have your umbrella company provide you with a company car and smartphone, and to these benefits can then be subtracted from your taxable income and will ultimately minimise your tax bill.
The up sides of establishing an umbrella company over paying self employed tax aren’t just that the total amount of tax to be paid may be lesser, they also include a significant reduction of the self employed tax paperwork, and even tax reliefs that are exclusively available for small businesses in certain industries.
Less honest users of the umbrella company UK scheme might also use it to get the most of their self employed tax relief by “employing” a spouse or family member as a board member or secretary. This third party is then remunerated by the umbrella company, rather than paying self employed tax. The amount salaried to this other “employee” is really a proportion of the income paid to the contractor by the contracting company, but by distributing this money among two employees of the umbrella company they are able to benefit from the untaxed income or “personal allowance” to which we’re all entitled, with the first chunk of their salary (today it’s the first £7,475, rising in 2012/13 to £8,105, with an additional increase included in in the Spring 2012 budget) going untaxed.