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Should you consider leaving your umbrella company in 2017?

Last updated on Thursday, January 5, 2017

Written by Andrew Trodden

2016 has been a challenging year for contractors using an umbrella company and 2017 does not look any friendlier. April signalled the end of Travel and Subsistence tax relief which has had a significant impact on thousands of contractors by reducing their take home pay. Should you consider leaving your umbrella company to have a more profitable 2017?

The impact of the new Apprenticeship Levy for businesses could be passed onto contractors

To quickly explain the Apprenticeship Levy, businesses with an annual payroll over £3,000,000 will be required to pay a 0.5% levy to the government to help strengthen the United Kingdom’s apprenticeship program. This will have a significant impact on umbrella companies.

Every contractor paid by an umbrella company is on their official payroll. Therefore, it is a fair assumption that a majority of umbrella companies in the United Kingdom will be required to pay the Apprenticeship Levy, and it could cost each of them thousands of pounds. It is unlikely they will cover this cost out of their own pockets, so contractors using their services should expect the weekly and monthly fees they are paying to increase, potentially significantly.

Travel and subsistence has already gone

A majority of contractors operating through an umbrella company were dealt a poor hand in April and the loss of tax relief on travel and subsistence expenses was a major blow. Only workers that travel to temporary sites (e.g. a heating engineer travelling to different homes) can claim travel and subsistence.

Travel and Subsistence was one of the major incentives for choosing an umbrella company as a payroll provider. A majority of umbrella contractors have been affected by this legislative change and left financially worse off.

The benefits of using an umbrella company are continuing to decline

2016 has seen a rapid increase in the number of contractors leaving umbrella companies and starting their own limited company. The reasons for choosing an umbrella company over the limited company option are at an all-time low. Contractors working via a limited company are able to claim a host of business expenses, including travel, subsistence, equipment, insurance and more (if outside IR35).

Some of the benefits that umbrella companies offer are not always as good as they sound; for example, holiday pay. Umbrella companies offer their contractors holiday pay. However, do not be misled. This does not work out as 20 days off work, fully paid. Instead, a contractor will be making contributions to their holiday pay via their weekly or monthly payments, and this will be reimbursed as “holiday pay” when requested. Therefore, holiday pay from an umbrella company is basically just another way of saving.

A limited company will ensure your take home pay is optimised

Starting your own limited company is the most tax efficient way to operate as a contractor. There is a common misconception that running a limited company is incredibly time-consuming, complicated and challenging. It is true that using an umbrella company is the easiest way to be paid as a contractor, but the loss in your earnings can be substantial compared to the limited company route, and running your own company is nowhere near as difficult as you might think. A credible contractor accountant will be able to take care of your administration/bookkeeping, company set up, tax returns, financial guidance and much more. Once set up and running successfully, you will only have a minimal amount of administration each month.

The graphic below shows how being paid by an umbrella company compares to being paid via your own limited company in the 2016/17 tax year. We have included the Churchill Knight & Associates Ltd fees in the limited company projection.

The difference between limited company and umbrella company take-home pay

Make the switch and start your own limited company

With the support from Churchill Knight & Associates Ltd, setting up a limited company can be completed quickly and efficiently. We have successfully helped over 10,000 contractors run their own limited company. Working in full compliance with HMRC legislation, we advise contractors how to legally maximise their take home pay and make the correct tax and National Insurance payments. Our account teams will handle your limited company expenses, bookkeeping, invoices and payslips - making sure that you get all the services that you need. Please give us a call today on 01707 871622 for more information.

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