When working through an Umbrella Company, the Umbrella Company becomes your employer and, as such, will be responsible for processing any expense claims that you may have. However, they also have a responsibility to you, to make sure that the expenses you claim are acceptable under HMRC rules.
Unfortunately some Umbrella Companies artificially inflate your take home pay expectations through a fixed rate expense e.g. £35 per day which they will refer to as ‘subsistence’, ‘daily allowance’ or a ‘scale rate payment’? If this expense is processed without asking whether or not you have actually spent that money you may be liable for an additional income tax liability.
HMRC refer to these daily expense claims as ‘scale rate expenses’ and this is what they say about them:
“Scale rate payments are only paid when the employee has incurred an allowable expense. A scale rate payment which is paid irrespective of whether the employee has incurred an allowable expense is simply a payment of earnings”
This means that, if an Umbrella Company is automatically processing £35 per day for their employees as an expense when they actually haven’t spent that money, HMRC will consider it to be earnings and therefore subject to tax. Otherwise it would be the case that HMRC were paying you just to go to work – not likely I am sure you will agree!
Therefore, before you join an Umbrella Company you should ask them whether or not they process daily amounts automatically and whether these amounts are subject to tax relief or not. Just 6 months of claiming £35 per day expenses for costs that you haven’t incurred could leave you with a tax bill of £1,820.00.
The only difference to your take home pay between one Umbrella Company and another is the difference in their margin. No Umbrella Company has been given special permission by HM Revenue for their employees to claim for things they have never paid for in the first place.
When choosing an Umbrella Company consider the following:
- Does the Umbrella Company have guaranteed service levels?
- Will you have your own point of contact?
- Does the Umbrella Company have an online portal?
- Is the Umbrella Company run by accountants or salesmen?
- Will the Umbrella Company margin be fixed or will it be variable and dependent on your assignment rate?
If you are looking to compare Umbrella Company margins, please take a quick look here: http://www.contractorumbrella.com/umbrella_company_comparison.html
If you would like a take home pay calculation from ContractorUmbrella, please click here. We will not make any assumptions on expenses, other than those you tell us about. The calculation is also based on a standard 1185L Tax Code, if you would like a more accurate figure based on your current tax code, then please give us a call and we can arrange for a mock illustration to be sent through to you.