There are a lot of benefits to working as a contractor. Having control of how, when are where you work can be more appealing than being confined to an office cubicle for set hours
As a contractor you can also enjoy the freedom of choosing the amount of work you take on and the projects you do.
However, one of the problems is that contractors aren’t sure where they stand and what they’re entitled to – and there isn’t a great deal of guidance. Specifically, many contractors are unsure about what expenses they can claim. In this post, we’ll take a closer look at independent contractor expenses and what you can and can’t claim.
Explaining limited companies, sole traders and umbrella companies
The expenses you can claim as an independent contractor depend on how you operate. There are three conventional routes into contracting, namely limited companies, sole traders and umbrella companies.
A limited company is where a contractor owns their own private company which has its own legal identity. This identity is separate from the owners or any shareholders. This means that owners cannot take money out whenever they want. Any money made by the company through sales belongs to the company, and so the owner must take out a salary or dividends.
Owning a limited company has its benefits, such as paying less tax than a sole trader. Limited companies are subject to UK corporation tax, which is a lower rate than standard income tax, and owners can split their take-home pay between salary and dividends to maximise tax-efficiency.
Being a sole trader is the most common route of self-employment. As a sole trader you run your business as an individual and there is no legal separation between you and your company. Setting up as a sole trader is simpler than setting up a limited company, but it has its disadvantages. Sole traders are personably responsible for any losses that the business makes which limited company owners are not. Sole traders also pay a higher amount of tax as they will need to go through self-assessment and pay as you earn (PAYE).
Umbrella companies are a common way for contractors to run their business and stay protected from IR35 tax laws. An umbrella company acts as a contractor’s employer and cuts out the responsibility for a contractor to manage the administration of tax. Instead, umbrella companies will calculate their pay with the correct tax deductions removed. They will also take a small fee for the umbrella company’s services.
Working through an umbrella company, also entitles you to many statutory UK employment rights like other employees such as paid sick leave, holidays and a workplace pension.
What expenses can limited companies claim?
There’s quite a range of allowed expenses that contractors with limited companies can claim for the purpose of conducting business. It is important that expenses claimed must solely be for business use and not personal. One example is a business trip with leisure days. The contractor can only claim for the duration of the trip that was used for business and not personal time.
Some expenses limited companies can claim:
These business costs should be deducted from your profits before tax, with any items used personally – such as a car – reported as a company benefit.
What expenses can sole traders claim?
You can still claim many expenses if you are a sole trader. However, how you calculate your taxable profits and business deductions is different to a limited company owner. Instead of deducting them from profits, they are deducted directly from your turnover, which leaves you with your taxable profits.
Expenses include:
What expenses can umbrella company contractors claim?
Unlike owning a limited company or being a sole trader, when contractors use an umbrella company, they are considered an employee of the company. This has an effect on the expenses that a contractor can claim. Using an umbrella company has its benefits, including knowing that correct tax deductions and the related administration is taking care of for you.
One downside is that before April 2016, contractors using this method could claim many expenses such as mobile phone bills and equipment. This changed after new HMRC legislation came into effect which restricted what employees could claim. This SDC legislation depends on whether you are deemed to be under the supervision, direction and control of your client.
Contractors working through an umbrella company can no longer claim the majority of these expenses, but they may be able claim some. If you are a mobile worker who is required to travel from their main place of work, you may be able to claim these travel and subsistence costs as tax-free expenses. However, if in the eyes of HMRC you fall under the SDC rules, you cannot claim tax relief on travel and subsistence.
It is always important to check with the umbrella company administration team and the client about expenses. Just like any other employee however, these expenses must be approved they are paid for by the recruitment agency, not the umbrella company.
Expenses are just another task to add to your list as a contractor. Why not make things easier with an umbrella company to take care of tax and payroll? At Umbrella Supermarket, you can compare a number of leading providers in minutes. Use our umbrella comparison tool to get quotes based on your income and choose the one that’s best for you.
Any contractor considering switching to an umbrella company will want to know how to find the best provider to work with.
Although you could spend your precious time and energy searching the web for the best umbrella company, there is an easier way – using an umbrella calculator.
In this guide, Umbrella Supermarket explains why every contractor should use an umbrella calculator in 2021.
If you are considering contracting you will need to decide on PAYE or umbrella.
It can be a difficult decision to make and contractors will inevitably be questioning which option will be the best for them.
To help every contractor get on the right track for them, in this guide Umbrella Supermarket looks at PAYE vs umbrella, outlining the key differences and how this will impact you.
There are many reasons that contractors across the UK opt to work under an umbrella company.
Umbrella companies offer an easy way to contract and remove the need for the contractors to worry about the burdens of admin, finances, tax and IR35, all things that limited company contractors have to deal with.
For this reason, many contractors will be weighing up their options and questioning whether it is worth using an umbrella company in 2021. To help make the decision that little bit easier, Umbrella Supermarket has put together this guide on the pros and cons of using an umbrella company.
Any contractor that is considering operating through an umbrella company in 2021 will need to understand Umbrella Company fees - from why an umbrella company charges fees, how they are paid to how much the contractor will pay.
In this guide, Umbrella Supermarket answers those all-important questions to help every contractor know exactly where they stand when it comes to umbrella company fees.
If you’ve made the decision to contract through an umbrella company in 2021, you will next need to find an umbrella company that’s right for you.
After all, there are lots of umbrella companies out there, so how do you know which one to choose?
To help you find the best umbrella company for you, in this guide Umbrella Supermarket outlines what makes a good umbrella company, so you can rest assured you’re making the right move.
One of the many advantages to operating through an umbrella company for contractors is that they become an employee of their chosen provider.
In turn, this means that the contractor will be automatically enrolled onto the umbrella company’s workplace pension scheme.
To help contractors find out more about umbrella company pensions Umbrella Supermarket has put together this handy guide.
If you are considering contracting through an umbrella company you will naturally have questions and queries over how they work.
After all, making the move to umbrella can be a big step for contractors. To help, in this guide Umbrella Supermarket explains how to get started with an umbrella company and share our top tips for using one in 2021.
PAYE or umbrella is a question asked by every contractor. Which one you opt for will have a big impact on your contracting career and lifestyle. So, it's important to make the right decision for you.
To help makes things a little bit easier, Umbrella Supermarket has put together this guide on PAYE or umbrella, outlining the key differences between each, to help you make the best and most informed decision for you.
One of the many benefits to working through an umbrella company is that you will receive holiday pay as well as a range of other statutory benefits including sick pay, maternity and paternity pay.
To find out more about umbrella company holiday pay, and how to calculate how much you will be entitled to, Umbrella Supermarket has put together this handy guide.
Contractors must make several decisions throughout their contracting careers. One big decision contractors have to make is how they will operate.
One way that contractors can work is through an umbrella company.
Umbrella companies have become an increasingly popular way to contract in the past few years, offering many benefits to the contractor. But, how do you know whether this option is right for you?
To help every contractor make the right decision for them, in this guide, Umbrella Supermarket explains when not to use an umbrella company.
There are tons of benefits to using an umbrella company, which is why they have become such a popular option for contractors in recent years.
After all, an umbrella company takes away the stress and hassle of operating through a limited company whilst offering contractors a range of advantages, such as statutory rights, paying them a salary, deducting correct tax levels and National Insurance, and taking care of tasks like expense processing and invoicing.
However, as more and more contractors opt to use the services of an umbrella company, more providers have started to claim that they are HMRC approved.
To bust the myths around HMRC approved umbrella companies and get straight to the facts, in today's guide Umbrella Supermarket look at whether HMRC approved umbrella companies really exist, so you know exactly where you stand.
If you're considering making the leap to contracting, you will understandably want to know how much you will have to pay in umbrella company costs. After all, this amount comes directly out of the contractor’s pocket, so it’s important to be clued up on how much you should expect to pay.
To help contractors, in this guide Umbrella Supermarket answer the all-important question of how umbrella companies cost in 2021.
