Umbrella Company Alternatives
With the Chancellor taking away their right to offset travel and subsistence against tax, many umbrella company contractors are looking for umbrella company alternatives or substitutes.
Even before this, there was a major differential between the tax paid by umbrella company contractors and those contractors using other tax vehicles.
We will take, as an example, IT contractors who earn the average contract rate in IT Contracting of £425 a day. That would work out to around £100,000 a year – a nice round figure for calculations.
Take Home Pay Differential
Here was the take home pay differential between contractors using umbrella companies and those umbrella company alternatives as tax vehicles:-
£65,000 – Umbrella Company Contractors
£75,000 – Personal Service Company contractors
£85,000 – Limited Company contractors using the most efficient tax planning
£85,000 – £90,000 – Offshore Umbrella Company contractors.
That was BEFORE the Chancellor’s recent raid on umbrella company contractors for extra tax.
IT Contractors Paying More in Tax
Prism reckon that the loss of the ability to offset travel and subsistence expenses against tax will cost the average IT contractor, working through an umbrella company, £6,500 a year in tax.
That would take the take home pay of the average umbrella company contractor to less than £60,000 a year.
That’s now £15,000 a year less than a contractor working through a personal service company.
It is £25,000 a year less than a contractor using a Tax Efficient Limited Company.
It’s £25,000 to £30,000 less than the take home pay for a contractor using an Offshore Umbrella Company.
Umbrella Company Contractors Outside IR35
That’s a lot of money for those contractors who are probably outside IR35, anyway, but don’t want the worry of a potential IR35 investigation. These can take several years and cost the contractor tens of thousands of pounds in back taxes.
That’s why many IT Contractors stay in umbrella companies. It is the fear factor. Despite the extra income, contractors don’t want to lie in bed at night worrying about an IR35 Investigation.
However, it would make as much sense, or even more sense, to lie in bed worrying about being struck by lightning.
More Likely to be Struck By Lightning than be Investigated for IR35 Tax
That’s right, you are more likely to be struck by lightning than be the victim of an IR35 investigation.
Indeed, you would be more likely to win the National Lottery than be the victim of an IR35 investigation.
There is strength in numbers.
It seems that the chance of an IT Contractor being the victim of an IR35 Investigation are around 1 in 60,000.
HMRC Lose Most IR35 Investigations
Also, HMRC lose the vast majority of these investigations anyway. Probably their main reason for continuing these investigations is as an example to the others.
They can’t hope to investigate the more than a million contractors who operate in the UK.
So, they try to make an example of some IT Contractors in high profile cases, to ‘encourage the others’.
IR35 Insurance for Contractors
Contractors can insure themselves against an IR35 investigation anyway. They can also take out insurance so that they can get themsleves professional help if they are investigated.
How much does IR35 Insurance cost? I think it is in the low hundreds.
It’s certainly a lot less than the £15,000 to £30,000 a year IT Contractors lose in their take home pay just to sleep soundly at night by not using an Umbrella Company Substiture.
Umbrella Company Substitutes / Alternatives
Among umbrella company alternatives there are Personal Service Companies (75%), Limited Companies Using Efficient Tax Planning (85%-90%Take Home Pay) and Offshore Umbrella Companies (85% to 90%).