Tax Efficient Umbrella Companies
This is a history of the advent of tax efficient umbrella companies.
In 1999 the Government brought in the IR35 legislation. That led to the advent of umbrella companies.
Previous to that, some people left their permanent jobs on a Friday and started again on the Monday as contractors. However, they just did the same job for the same company at the same place of work.
This benefited both the companies and the ex-employee contractors financially. However, the Government and HMRC lost out financially.
They described these people as disguised employees – and so they were. There was a big scandal in the newspapers about it.
So, the Government decided to do something about it.
They brought in IR35 to catch these disguised employees.
However, not only did the IR35 legislation catch those disguised employees in its net but it caught contractors who were not disguised employees but who had been operating as proper contractors for many years.
However, the Labour Government enjoyed the extra tax income it brought in so didn’t get round to correcting their ‘mistake’.
Those contractors who were not caught by IR35 remained in their Limited Companies.
Very few actually paid the IR35 tax.
Most, who thought they may be inside IR35 went into the newly created umbrella companies.
This enabled them to claim such expenses against tax as travel and subsistence (if outside IR35), accommodation, pension contributions, equipment like PCs and memberships of trade organisations. The Chancellor later stopped them claiming travel and subsistence
Although contractors, they operate as if they were employees of the brollies and pay PAYE – after the brolly deducted expenses.
Disguised Employees and Disguised Contractors
It was very wry that a new breed of disguised contractors evolved when the Government were trying to catch what they called disguised employees.
They considered Umbrella Companies relatively safe.
The Government were happy to allow contractors to be able to claim some expenses against tax, which they couldn’t do if they paid IR35 tax. This is because they preferred to deal with, and legislate for, a few hundred umbrellas rather than hundreds of thousands of limited company or self-employed contractors.
Many IT Contractors will change their working practices and go back to operating through Limited Companies.
Others will consider joining umbrella companies or substitutes like tax-efficient managed limited companies.
Umbrella Companies Returns
Brolly contractors pay around £10,000 a year more in tax than limited company contractors. Limited company contractors pay £10,000 a year more tax, on average, than a tax efficient umbrella company contractor.
If an IT Contractor earned £100,000 a year, he, or she, would probably keep about £65,000 of that as an umbrella company contractor. They would keep £75,000 as a ltd company contractor. They would keep £85,000, or more, as a tax efficient company contractor.
To find out more about tax efficient umbrella companies, or to apply to one or more, click on