How an Umbrella Operation Can Help You
If you’re employed on a contract basis or pay self employed tax, you might find that you pay substantially more self employed tax than you absolutely have to. By creating an umbrella company you will be able simplify the system through which you are rewarded for your labour, and claim a good deal of everyday expenses against your tax liability.
To posit an example, if you were a consultant hired by a pharmaceutical company on a self employed basis, you may opt to create an umbrella company which would be your employer on a full time basis, and be reimbursed for your labour by the company to which you are contracted. The umbrella company could then salary you as an employee rather than as a casual labourer. The other big benefit to umbrella companies is that you can also, and simply, declare legitimate business 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 you are taxed. The expenses that the umbrella company might be able to deduct from your self employed tax in this manner might include travel expenses, your wifi at home if you have a home office. You could also choose to have your umbrella company issue you with a company automobile and company mobile, and to a limited extent these benefits can then be deducted from your tax liability and will ultimately reduce your tax burden.
The up sides of setting up an umbrella company over paying self employed tax are more than just that the total amount of tax to be paid could be reduced, they also include a considerable cutting of the red tape surrounding the self employed tax paperwork, and even some tax reliefs that are offered by HMRC to small businesses in certain industries.
Less honest users of the umbrella company system might also use it to increase self employed tax relief by “employing” a spouse or relative as a board member or secretary. This third party is then paid by the umbrella company, rather than paying self employed tax umbrella companies. The amount paid to this other “employee” is in reality a part of the income paid to the contractor by the contracting company, but by sharing this money between two employees of the umbrella company you can benefit from the untaxed income or “personal allowance” to which we’re all entitled, with the first portion of their salary (currently the first £7,475, from April 2012 it will rise to £8,105, and with a further rise announced in the March 2012 budget) going untaxed.