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How the 2016 Budget will Affect Contractors using Umbrella Companies

Changes to Tax Relief


In the 2016 Spring Budget, the Chancellor George Osbourne confirmed changes to tax relief on travel and subsistence (T&S). This applies to contractors that work and are paid through Umbrella Companies.

Up until now, any contractors who are required to travel a reasonably long distance or stay away from home for a contract could claim tax relief on the expense.

However, even contractors commuting a reasonably short distance could still claim travel expenses and subsistence for lunch and dinner.

Changes for Contractors Operating Through Umbrella Companies


So what is the change? From April 6th 2016 contractors who operate through an Umbrella Company will not be able to claim for this additional relief, unless they can demonstrate and prove that they are not under any supervision, direction or control from their client whilst performing their role.

The result in the short term is most contractors will end up paying more tax.

This could discourage some contractors from taking roles further away from home or encourage others to enter the permanent marketplace, which could drive up contract rates due to a skills shortage in the IT & Technology sector.

"Here at FCSA we have tirelessly campaigned against these changes to tax relief, and we are disappointed the flexible workforce is being penalised," said Julia Kermode, Chief Executive of the FCSA,

"Recent research undertaken by FCSA, REC and CBI suggests that just 35% of hirers are fully aware of the changes, and 92% of those who are aware cannot compensate workers for the financial loss incurred. It seems that the only outcome of the reform is to reduce the income of hardworking contractors who enable businesses to be agile, and are the backbone of economic recovery."

The Effects


The results long term are not as clear, but Umbrella Companies have seen this coming for a while and have been working closely with the FCSA (Freelancer & Contractor Services Association) and HMRC to put in place a number of products and offering new arrangements to try and minimise the tax impact and risk for their contractor clients.

Other options open to contractors are to set up a PSC (Ltd Company) and make use of tax benefits available, however contractors should take proper advice on whether this is the best decision all round.

Based on rate of pay and the nature of the job role, contractors operating through Ltd companies might well be subject to higher tax and NI contributions because they fall ‘inside IR35’. FCSA full member accountants can advise on IR35 status and the impact on your personal service company.

Another announcement by George Osborne detailed PSC’s or Ltd Companies working on government sites (NHS, Councils, Central Government) having to adhere to strict tax rules around IR35 from April 2017.

Oscar's Advice to Contractors


Our advice would be to tread very carefully when it comes to how your tax affairs are handled and how you operate.

If you are new to contracting then make sure the Umbrella Company you use is a full member of the FCSA. This will ensure that they are offering you HMRC approved schemes that help you manage you tax affairs fairly and efficiently.

If you choose to set up a Ltd Company, again take proper advice from your accountant and where there is ‘supervision’, ‘direction’ and ‘control’ from the client be aware that you might fall within the IR35 tax regime regardless and will have to contribute proper Tax and NI contributions.

For more information on T&S and the new Tax Laws around IR35 go to the FCSA website.

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