The Government has called time on Travel and Subsistence claims where a contractor is working via an umbrella company. The changes are expected to have a huge impact on the take home pay of contractors working through an umbrella company as the main benefit of using an umbrella company will be removed as of 6th April 2016 when the changes takes place.
What is a Travel and Subsistence claim?
To recap, Travel and Subsistence includes expenses such as transport, mileage and food in addition to other work-related expenses. At present, contractors operating via umbrella companies are able to claim these expenses and receive considerable tax relief against the cost of these.
Why are the rules changing?
The Chancellor, in the Autumn Statement 2015, announced that he wants to end this method of tax relief, as it has been discovered that many contractors are claiming more than they are due, at a cost of £265 million to tax payers. In many cases, contractors are claiming travel expenses for journeys from home to work, which permanent workers are unable to claim. The Government is essentially trying to create a ‘level playing field’ where permanent workers and contractors are more tax-equal in the eyes of the HMRC.
Additionally, many are making false expense claims for journeys that never occurred, and some umbrella companies – who know full well what the tax laws are – are helping contractors avoid taxes to their benefit. It is acts such as these that make the credibility of umbrella companies questionable, and contractors who do follow the rules will suffer the consequences.
What does this mean for umbrella company contractors?
Most contractors operating via an umbrella company will find they have a reduced take home pay from 6th April 2016. As this already sits at a low 68% with umbrella companies, this effect will have a huge financial impact on contractors.
The following umbrella company calculations demonstrate the monetary impact of the looming change on contractors’ take home pay from financial year 2015/16 to 2016/17:
|Umbrella Company – 2015/16 (with expenses) – based on a monthly calculation||Umbrella Company – 2016/17 (without expenses) – based on a monthly calculation|
|Monthly Rate||£ 4,000.00||Monthly Rate||£ 4,000.00|
|FRS Bonus||£ 00.00||FRS Bonus||£ 00.00|
|CKA Instalment||£ 120.00||CKA Instalment||£ 120.00|
|Deemed Grossed Salary||£ 3,491.46||Deemed Gross Salary||£ 3491.46|
|Expenses||£ 200.00||Expenses||£ 00.00|
|Employer’s NI||£ 364.29||Employer’s NI||£ 388.54|
|Employee’s NI||£ 00.00||Employee’s NI||£ 00.00|
|Salary PAYE & NI||£ 803.77||Salary PAYE & NI||£ 853.35|
|Net Salary||£ 2,511.94||Net Salary||£ 2,638.11|
|Salary & Expenses||£ 2,711.94||Salary||£ 2,638.11|
|Total Payable||£ 2,711.91||Total Payable||£ 2,638.11|
|Take Home Percentage||68%||Take Home Percentage||66%|
Based on the above example, there could be a loss of £73.83 per month in a contractor’s take home pay; this equates to an annual take home pay reduction of £885.96. Whereas if you are operating via a limited company from 2015/16 to 2016/17, you retain the same take home pay percentage based on a monthly rate of £4,000 and if you operate outside IR35, you can still claim genuine Travel and Subsistence claims. See the example below:
|Umbrella Company – 2016/17 (without expenses) – based on a monthly calculation||Limited Company (with expenses) – based on a monthly calculation outside IR35|
|Monthly Rate||£ 4,000.00||Monthly Rate||£ 4,000.00|
|FRS Bonus||£ 00.00||FRS Bonus||£ 176.00|
|CKA Instalment||£ 120.00||CKA Instalment||£ 192.00|
|Deemed Grossed Salary||£ 3,491.46||Gross Salary (based on £10,600 PA)||£ 883.33|
|Expenses||£ 00.00||Expenses||£ 200.00|
|Employer’s NI||£ 388.54||Employer’s NI||£ 28.61|
|Employee’s NI||£ 00.00||Employee’s NI||£ 25.40|
|Profit Before Tax||£ 2,872.05|
|Corporation Tax||£ 574.41|
|Salary PAYE & NI||£ 853.35||Salary & Expenses||£ 1,057.93|
|Net Salary||£ 2,638.11||Dividend Payable||£ 2,297.64|
|Total Payable||£ 2,638.11||Total Payable||£ 3,355.58|
|Take Home Percentage||66%||Take Home Percentage||84%|
Based on the above example, there could be a loss of £280.49 per month in a contractor’s take home pay. This equates to an annual take home pay reduction of £3,365.88.
Whereas from 2015/16 to 2016/17, a contractor retains the same take home pay percentage based on a monthly rate of £4,000. They can also still claim genuine Travel and Subsistence expenses if they fall outside of IR35. See the example below:
The glamour of working under an umbrella company is quickly fading as we approach the next financial year. Given the vast reduction in net income and removal of the main benefit of working through an umbrella company, contractors should question this payroll solution altogether and consider what’s best for them long term.
How to avoid being affected:
Contractors concerned about the effects of these potential changes may want to look for alternative payroll solutions. If you were to operate via your own limited company, outside IR35, you would not be affected by the possible end of Travel and Subsistence claims as genuine work related expenses would be claimable.
Churchill Knight & Associates Ltd can provide you with a tailored quote on your take home pay, and advise you on both the umbrella vs limited company option. In addition, our expert consultants can provide you with advice on what your best options are for you and your business.
With umbrella companies changing, it’s time to find out what your options are.