Umbrella companies expect new laws limiting the expenses their contractors can claim

Umbrella companies expect new laws limiting the expenses their contractors can claim

HMRC has been aggressively pursuing its goal of tightening up on tax loop holes and grey areas for several years now. As part of their broader campaign to investigate widespread ‘abusive tax avoidance’ across a number of sectors, HMRC has now begun looking more closely into the unscrupulous practices of a number of PAYE Umbrella companies.

Tax avoidance schemes of some PAYE Umbrella companies

Some contractors choose to work via the Umbrella company route rather than setting up a Limited Company with many being lured by the attractive net salary calculations offered. However, HMRC are considering introducing new legislation to stamp out a practice by some Umbrellas of forcing their employees to take more of their pay as repaid expenses, rather than salary. This way the Umbrella avoids paying large sums in tax as National Insurance Contributions are only payable on salary paid out, not on expenses reimbursed to their employees.

The issue for these Umbrella employees is that if HMRC decides the payments were in fact mostly salary they could demand payment of any tax due directly from the individual rather than the Umbrella company.

Forward thinking Umbrella leads the way

It is currently un-clear exactly how widespread these practices are or how many contractors have been affected. However, HMRC have sent out a strong warning that they are now targeting investigation into this area and intend to make changes soon. In response, many contractor Umbrella companies have been tightening the expenses policies for their own contractor employees.

Umbrella or Limited Company?

For some contractors using an Umbrella company may the best solution for their needs. For others setting up a Limited Company could result in legitimate tax savings as well as more flexibility in the types of contract they are able to attract. If you are currently debating which option to choose, or are thinking of switching from an Umbrella to a Limited Company set up, contact us at Intouch Accounting for an initial discussion.


This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.