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  • Writer's pictureUmbrella Search

Contractor's guide to umbrella company expenses

Updated: Nov 14, 2023

Whatever industry you operate in, every contractor wants to ensure they are being tax efficient and are claiming back tax-deductible expenses where necessary.

In this guide, Umbrella Search outlines everything contractors need to know about umbrella company expenses, from what you can claim, the different expense categories, to what this will mean for your contractor pay.

Umbrella company expenses explained

It's important to note that the rules on umbrella company expenses have changed in recent years.

Before 2016, umbrella company contractors could claim tax relief on any cost they incurred exclusively because of the contract, and that was necessary in order to carry out the contract.

However, the rules were changed in the April 2016 for umbrella company contractors operating inside of IR35. From this point onwards, umbrella company contractors were not able to claim expenses on things such as travel occurred during the commute and subsistence.

This was due to the fact that such contractors were providing their services via an umbrella company, through which they were employed.

Just as umbrella company contractors are considered as permanent employees for things such as tax purposes and statutory benefits, it was decided that they would also be treated in the same way when it comes to certain expenses. After all, permanent employees in the UK cannot claim their costs incurred on their commute as an expense, and so it was decided that umbrella company contractors would not be able to either.

What expenses can I claim?

Although the rules were changed, umbrella company contractors are still able to claim certain expenses. It's important that contractors are in the know when it comes to what they can claim back as an expenses, as this will help to reduce your tax bill.

Find out more about how contractors pay tax through an umbrella company in our useful guide.

Umbrella company contractors might be able to reduce how much tax they owe by claiming back certain expenses including:

Training: contractors that carry out training courses related to the contract work at hand are eligible to offset the cost of this

Accommodation: if you have to stay away from home for the contract you are working on, or travel for a course you must attend related to the contract, then contractors are able to claim back the costs associated with this, including hotel or accommodation costs and meals.

Equipment: if you need certain tools or equipment in order to carry out the work then you can usually claim back the cost of these.

Travel: if you have a regular workplace but are sent by the client to work at a different location temporarily, then HMRC might allow you to claim back the tax deductions for the travel and subsistence expenses incurred whilst travelling to the other workplace. This means you can either claim back the train, plane or bus cost or can claim back mileage if you travelled by car or motorbike. The rate of reimbursement for this is 45p per mile for a car, 24p for a motorbike and 20p for a bicycle.

It's always a good idea to talk to the umbrella company you're working with to double check what you can claim back and what the company will require from you in order to do so.

What is an umbrella company?

How do I claim back expenses?

When it comes to claiming back expenses, it's important that contractors practice good record keeping. This means that contractors should keep relevant receipts and invoices, which the umbrella company can then process. It's important to keep and record all expenses as HMRC can look back as far as 6 years if they were ever to investigate you so it's recommended that you keep all relevant receipts for this amount of time.

Contractors may find it advantageous to use expense tracking apps to ensure their records are always on hand and up to date.

Usually, the contractor will submit their timesheet to the umbrella company, outlining hours worked, and at the same time will inform them of any expenses incurred.

Contractor timesheet Umbrella Search
Example of the Contractor Time Sheet from Umbrella Search

The umbrella company will then take care of invoicing the client. The client pays the umbrella company directly and once they receive payment, they will offset the cost of expenses before deducting tax and National Insurance and then paying the contractor their salary.

The contractor will then receive their pay alongside a paylslip outlining deductions including as tax, National Insurance and expenses.

What does this mean for take home pay?

Being able to claim expenses is great news for contractors as it reduces the amount of tax they will owe.

For example, if a contractor earned £2,000 in a month and had £500 of expenses, rather than being taxed on the full amount of £2,000, you will be taxed on £1,500 instead. This means that you will be taxed on the lesser amount of £1,500 rather than £2000, meaning you will pay less tax which is seen as a great benefit to claiming back expenses.

Now you know what expenses you can claim are you ready to take the next steps?

The ability to claim back legitimate business expenses is a great advantage for umbrella company contractors that can significantly impact your finances and reduce your tax bill.

Now you know what expenses are eligible, what proof you need in order to claim these and how you can offset them, you're ready to make the most out of umbrella company expenses. What's more, your chosen umbrella company will be there to advise and guide you on expenses to ensure you're making the most and maximising efficiency.

If you are now considering using the service of an umbrella company to help take advantage of things such as umbrella expenses, Umbrella Search is here to help.

We will work hard to find an umbrella company that fits with your contracting values, has a great reputation and will help make your contracting career that little bit easier.

To see how we can help you today simply get in touch.

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