Published on Monday, December 14, 2015 in category:
In our last article, we discussed the bill in general terms and how it would affect limited company contractors in particular. We established that most genuinely independent contractors won't be affected at all. But what about the other side of the contractor market? What about umbrella contractors, how have they fared?
Not good, is the short answer. Not good, is also the long answer.
From April 2016 umbrella contractors will not, under any circumstances, be able to claim tax relief at source for travel and subsistence (T&S) costs and only those contractors who are not subject to "supervision, direction or control" (SDC) will be able to claim tax relief on these costs through their self assessment tax return, at the end of the financial year.
It is those umbrella contractors who do not consider themselves subject to SDC that we are addressing in this post. The Bill, while initially may seem like a whole world of pain, may in fact present an excellent opportunity for you: if you are not subject to SDC does it not make sense to finallly strike out on your own and go limited? The tax landscape for umbrella contractors is such that there is really no advantage in the status quo.
What is the real difference likely to be after April 2016?
From a tax point of view, a limited company has always been more attractive than umbrella. However, there is more work involved in the management of the limited company and there needs to be an element of discipline as you will be holding onto money that belongs to HMRC and you will need to resist the urge to spend it. But that aside, there are only benefits. The way dividends are taxed is changing, and prospective limited company contractors need to be aware of that, but in general terms, and especially now that the tax relief on T&S expenses is being withdrawn for umbrellas, an umbrella contractor is going to be worse off than a limited company one.
After 5th April 2016, an umbrella contractor earning £80,000 and incurring travel expenses of £500 per month can typically expect a "take home pay" of £47,700 per year. A limited company contractor, extracting all profits in dividend, and wth no additional shareholders would expect to take home £67,800. So, even after the new rules are stepped in, there's a massive saving to make.
And when you factor in other tax planning possibilities such as shareholder changes, retention of some funds, the use of pensions etc, then the savings can be, and regularly are, even greater.
Umbrella contractors who truly are not subject to SDC should give serious consideration to forming a limited company. Professional assistance is definitely recommended. Contact us now to arrange an appointment - face-to-face in Edinburgh, Glasgow, Aberdeen or Grangemouth, or by 'phone or online anywhere else in the universe.