Dispatches: Low Pay Britain

Dispatches: Low Pay Britain

Last night Channel 4’s Dispatches investigated the reality of employment for many in modern Britain and how some big name brands utilise complex schemes to save hundreds of pounds on their wage bill. Intouch Accounting’s Managing Director, Paul Gough, watched the programme with interest to see what the future looks like for Low Pay Britain…

30 years ago it was commercially acceptable and almost socially acceptable to mitigate your personal or corporate tax liability based upon what an accountant might call tax planning. Tax planning in this context is a legal means of putting your business or employment affairs in good order in a manner which reduces your tax liability. (Lord Clyde agreed)

“No man in the country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or property as to enable the Inland Revenue to put the largest possible shovel in his stores. The Inland Revenue is not slow, and quite rightly, to take every advantage which is open to it under the Taxing Statutes for the purposes of depleting the taxpayer’s pocket. And the taxpayer is in like manner entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Inland Revenue”

Lord Clyde, 1929

In the past planning was an acceptable way to arrange your affairs in such a manner that reduced taxes so long as the loser was perceived to be HMRC and if, by a little imagination, you could derive a legal tax advantage, then good for you. Not so any more.

In 2015 Britain if a person or corporation arranges his affairs with the effect of reducing the amount of taxation payable by them, to the detriment of another (worker or supplier) then that is now deemed by HMRC and many other taxpayers as morally corrupt. In times of austerity the public needs the tax.

Dispatches correctly highlighted that the lower paid and vulnerable workers often do not understand the differences between being an agency employee or an Umbrella worker or even the full implications of being self-employed. These workers do need and should get protection from their unions, the GLA and HM Government and it’s politically and morally right to level the playing field making sure we all pay our fair share of taxation in order that we can protect our hospitals and roads and education. But how do you do it?

The programme’s use of the Only Fools and Horses theme tune and in using vocabulary like: corrupt, dodgy, tax avoidance and tax evasion present the case  that arrangements or structures designed to reduce tax payable to the Treasury are no longer acceptable means of keeping more in your pocket. Increasingly such avoiders are being seen as not making a fair and equitable contribution to the nation’s coffers and that is not the British way.

Who are the losers?

The losers are all of us. We work hard and pay our taxes and yet abuse of the low paid is allowed to continue in the largely unregulated temporary employment sector. From the political expediency of Job Centres pushing unsuitable workers into self-employment to end-hirers wanting to share costs reductions with agencies and Umbrellas who are willing to facilitate aggressive tax schemes to reduce the tax take.

The problem is that I and I expect you, do not know where the line is between normal business and personal objectives which use commercial good sense to reduce costs (of which taxation is one) and unlawful “wriggling” to the outside of tax legislation to remove or reduce a tax burden that would in part be used to pay for the things we all expect to have like a functioning NHS.

We understand legal boundaries and the need for protection of the vulnerable, but more and more the arguments being put forward are that it’s not fair, or the playing field is tilted, or the Nation needs more tax so dig deep.

I think abuse and exploitation are legitimate targets for anti-abuse legislation and punishment however care is needed in targeting only the guilty, for there a many organisations providing stimulus and jobs in the UK temporary worker, freelancer and contractor sector that do not deserve to be called guilty, even if the way they operate enables their independent Umbrella workers, the genuinely self-employed and those with personal service companies to utilise tax allowances, incentives and reliefs which only exist because they were created by the Government ! Let’s keep the debate about legality and not about morality.


Do you work for an Umbrella? Read our Travel and Subsistence: It’s robbery blog to find out what HMRC’s current review of T&S claims might mean for you.

 Time to switch to Limited? Contact us to discuss your options.

 

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.

Are you claiming the new Employer’s Allowance?

Are you claiming the new Employer’s Allowance?

One of the welcome changes confirmed in the 2014 Budget is the new Employer’s Allowance, which entitles most employers to reclaim up to £2,000 in Employer’s National Insurance.  The aim of the allowance is to reduce the cost of employing people, and thus generate more jobs.

The new Employer’s Allowance cannot be claimed by everyone, the main exceptions being domestic servants (including nannies), some who work in the public sector and those who pay salary only via a deemed salary calculation.  That’s not to say you cannot claim if you’re subject to IR35, it’s simply that you can only claim on the salary actually paid during the year and not the salary you’re “forced” to take via the deemed salary calculation at year end.  The simple solution is therefore to take a salary of at least £22,400 during the year, thus creating an Employer’s National Insurance liability of just under £2,000 which you can then reclaim in full.

Another notable exception relates to companies that are under common control, so if you have two companies and control them both, or one owns the other, make sure you’re only claiming on one of them.

If you are entitled to the Employer’s Allowance, what is the best salary to take?  The answer is of course never simple!

Many contractors will have a normal tax code of 1000L and will be able to earn up to £10,000 before any income tax becomes due.  NI will kick in at £7,956 so you’ll have 12% Employees NI and 13.8% Employers NI – the new Allowance removes the 13.8% though, so you’d be left with a liability of just £245 in Employees NI.  Add to this the fact that salary is deductible for Corporation Tax purposes too, so you’ll save 20% of the gross salary which equates to £2,000, and you’re left with an overall tax saving of £1,752.

But what if you have other income, like bank interest or rental profit?  There may then effectively be tax payable on your salary after all, and the figures above could change quite dramatically.  Other considerations include National Minimum Wage, which should be thought about if you want to pay statutory payments like Maternity Pay or Paternity Pay.  If either of these apply to you then check with your contractor accountant and ask for a personalised example before you make a decision.

One final thought – this Allowance also adds yet another reason why a Limited Company is better than an Umbrella.  As an employee of an Umbrella you won’t gain from this at all, but your Umbrella company will!

To find out more about the benefits of Limited Company contracting please give us a call.

 

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.

When is the best time to convert from an Umbrella company?

When is the best time to convert from an Umbrella company?

Some contractors choose the Umbrella route for accepting payment of their client fees. This can initially be an attractive option as all tax aspects are dealt with by the Umbrella, leaving the contractor free of almost all paperwork. However, setting up with an Umbrella means that, for tax purposes, the contractor is an employee of the Umbrella. As an employee all income, except reimbursed expenses, will be subject to PAYE and employers NIC payments. In some cases the contractor will end up paying far more tax than they need to by choosing this route. They could also miss out on potential tax breaks in other areas simply because they are an employee of their Umbrella rather than set up as Limited Company.

If you are currently with an Umbrella you may be thinking about converting to a Limited Company set up to begin enjoying the financial benefits.

 

Keep more of your income

One of the key advantages of setting up as a Limited Company is that you can increase your net income with good tax planning.

For example:

  • For the 13/14 tax year, if you are a Limited Company and you give yourself an average salary of £12,000 per year, you will be able to take around £26,505 in net tax free dividends per tax year (assuming you are outside of IR35).
  • As a simple comparison, roughly with an estimated income level of £50,000 per annum, the difference in net take home pay would be:

Limited Company of £37,621    v    Umbrella of £30,026.

The Limited Company route offers clear savings for contractors by having a low salary with tax free dividends paid throughout the year.

 

When to make the change

In terms of when in the year to make the change, the start of the tax year is always a good time to switch employments. This way you can take full advantage of the tax allowances available to you in the new tax year. If you switch from an Umbrella to a Limited Company at the beginning of the tax year you will have had little or no employment income and will therefore be able to maximise your tax free dividends.  However, making the switch at any time of the year will make you more tax efficient.

 

How to switch

If are interested in making the change from an Umbrella, or would simply like to find out more, contact us at Intouch Accounting. Making the switch is an easy process and you could soon be reaping the benefits of maximisation of your contractor and personal income.

 

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.

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.

Umbrella company avoiding National Insurance

Umbrella company avoiding National Insurance

If my Umbrella company reduces my salary and increases my expenses to avoid National Insurance am I at risk?

If this is something that your Umbrella company is doing there is definitely a possible risk. If any expenses listed fall outside HMRC rules on what is allowable as a legitimate business expense you will be personally liable for any unpaid tax owed. Even though you are an employee of the Umbrella you are still personally responsible for your tax, so it will be you who will have to pay any additional tax due. This is true even though the expense calculations have been done by your Umbrella company on your behalf. These amounts can also be chased by HMRC in later years. So, if the expenses portion of your salary looks un-naturally high, it is serious cause for concern.

Many Umbrella companies have been granted what is known as ‘dispensation’ by HMRC. A dispensation allows an Umbrella to apply standardised amounts to specific expense items eg: £21 per day for subsistence. The Umbrella will then apply these expense items and set scale amounts to your net pay calculation. Under the dispensation the Umbrella does not have to supply receipts for these either, which makes administration easier for them. Do remember this is not a “blank cheque”, as a general rule you do need to be aware of claiming only what you spend, and ensure you only claim the subsistence amount when you’ve actually spent something. However, it is in your interests to keep complete records of your own, as receipts would be required in the event of an HMRC inspection. Some Umbrella companies have unfortunately pushed the limits of their discretion under their dispensation agreement a little too far. This pushing of boundaries is where problems in this area start.

What can I do about it? Does the Umbrella company have to tell me if they are being aggressive or downright dodgy?

The Umbrella company has an obligation to explain to you all amounts appearing on your payslip. Ideally it should be able to explain the basis of your expenses calculation and also be able to reference the relevant HMRC guidance. Some companies supply online pay calculators, but be aware that these are only as accurate as the information supplied. Some only ask for basic information which may not produce an accurate figure. The simplest pay calculators are often based on averages and can be used only as a guide.

If your Umbrella company is not supplying satisfactory answers to your queries the best course of action is to contact another independent adviser and get answers to your questions. They can also review your overall circumstances and confirm if using an Umbrella remains your best option. This way you are protecting your interests by nipping potential problems in the bud.

 

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.

Switch from an Umbrella Company

Switch from an Umbrella Company

It’s simple to switch from an Umbrella company.

If you are looking for flexibility, permanence and more take home pay then perhaps switching from an Umbrella company to a Limited Company is right for you?

Using an Umbrella company suits many contractors and freelancers when they first start out as it takes away the administrative hassle, however there are draw backs! An Umbrella company will charge a fixed fee for their service and you will effectively be employed by the Umbrella Company.

If the time has come where you are now comfortable with contracting, want to become more independent and receive more take home pay then switching to a Limited Company makes sense.

Intouch contractor accounting provides a simple, cost effective and stress free service for freelancers and contractors who want to switch from an Umbrella company to a Limited Company.  Helpful hints and top tips are available on the Intouch website about switching from an Umbrella company or our contractor accountants can guide you by answering your questions and even answer some of those you may not know to ask.

It really is very simple to switch! So isn’t it time you made the most of all the opportunities available to you as a contractor?

 

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.

Umbrella vs Limited comparison

Umbrella vs Limited comparison

So you decided to enter the freelance market and become a contractor? But of course starting off is so full of uncertainty and potential risk that you looked for the simple and easy route to entering the market – an Umbrella solution.

Naturally, back then it seemed like the right thing to do. After all, you gain many of the freedoms of being a freelance worker without any of the long-term commitments. And making the most financially out of the decision was perhaps lower down your list of priorities.

But as time progresses, you may begin to think and ask whether your working solution truly reflects the high degree of professionalism with which you provide your skills. And are you making the most of all the opportunities available to you as a contractor?

Being in business is a challenge – there’s no denying that. And the challenge is not for everyone. So why complicate your life with running your own business? Is it all about money or is there simply a better way to fulfil your original objectives?

No doubt part of the decision making process when moving to contracting was about the money … finally being paid what you’re really worth. Having choice and that feeling of freedom, gaining a wider experience in different working environments and being able to take chunks of time off when it suits you are also arguments we have heard for making that leap into the unknown.

But eventually we all ask ourselves … are we doing the right thing, and are we doing it the right way?

 

So, what are the alternatives … and where can you get a truly unbiased view of the pros and cons of each?

Well, we at Intouch are providers of Limited Company solutions, so we obviously have a vested interest in explaining just why you should make the switch to running your own business. But that’s not what we’re here to do…

We agree that being an Umbrella can be the sensible option if it feels right, if you’re happy with the solution and you feel you’re going to get the most from how you operate. But let’s explain the differences between being Limited and being an Umbrella in a straight-forward, honest way … the “warts and all” … and leave you to answer that key question yourself … am I doing the right thing, in the right way?

 

Umbrella vs Limited – the “low down”

One of the main advantages of an Umbrella is its simplicity. You get a contract, refer to your Umbrella company, and it’s all systems go. All you need to do is record your time, record your expenses and … hey presto … you get paid. You don’t even have to worry about tax – it’s all dealt with for you. Hey, take the money and run, why not?

But is the choice really that simple?

We like to think that there are contractors out there who are concerned about getting the most from their efforts. After all, whether you are working through an Umbrella or through a company, your day-to-day work is exactly the same … you go to the client, you work, you hope to get paid.

But what if you could get paid MORE…?

Well the answer depends on whether you judge your income level by the rate you charge or the amount you take home to spend. The simple answer is that whether or not you are subject to IR35 you can take home more money for the same effort than you can from an Umbrella.

So making the switch from an Umbrella to your own company is a bit like an immediate uplift in pay. Although unfortunately there is a price – admin! But is the price really that much? And who can honestly say they don’t want a pay rise?

Let’s take a look at an example …

To get us going, let’s make some assumptions…

You work 35 hours a week for £40 an hour. You work 45 weeks a year. Whether you are an Umbrella worker or a Limited Company contractor your income is the same – £63,000.

You claim the same travelling and subsistence expenses whether you work via an Umbrella or a company; let’s say £100 a week, so that’s £4,500.

You want to pay some pension, say £200 a month; and a bit of sickness cover, say £45 a month, so those cost you £2,940. Basically no difference whether you’re an Umbrella or a company either!

You pay an Umbrella £25 a week plus VAT, but only when you work, we’ll use Intouch’s monthly fee here of £85 per month plus VAT. So we have a slight difference here.

An Umbrella is costing you £1,350 and Intouch costs you £1,224. But hang on … is that right? How can an accountant cost less than an Umbrella? Ok let’s reduce the weekly fee for the umbrella to £20 a week plus VAT – that’s £1,080 (hope you don’t pay more!)

 

Ok are there any other differences in the numbers we are going to work with? Yes, there are many costs you can claim against tax as a company you can’t usually claim through an Umbrella, what about:

  • The computer you use when working at home needed replacing, now that costs £800 including the printer, and the running costs and a bit of legitimate software are about £400 a year
  • The mobile phone, which you can put in the company name, let’s say £480 a year
  • Maybe some use of home as an office, let’s say £156, plus some of your home phone, say £80, it’s not a real cost but you can have some tax deducted anyway
  • Your subscriptions to a professional body, and a couple of techie magazines, that’s £240 a year
  • That all important staff party for you and your wife, that’s £300
  • Life insurance, got to be careful here, but there are some clever products that can be paid by the company without taxes being charged, that’s another £480

 

So there are some extra costs here that a company could incur – or rather get tax relief for – totalling £2,916. It could be more, but our experience says its around that figure.

We forgot the spouse … they don’t go out to work, but they do help out with some admin, so the company should pay them. And of course they are a director too, so let’s pay them £600 a month. That’s a good level; it absorbs tax-free pay and incurs no National Insurance (NI). So no tax to pay – just a bit more legal tax relief.

Then your spouse also holds some shares. But we’ve been a bit clever here and thought about tax when we created your company, so your spouse holds “B” shares and you hold “A” shares. We’ll see why later.

But what about you? Well, you should be paid at least national minimum wage for your hard efforts, so you’ll get £12,000 a year. That incurs a bit of NI and some PAYE and some employers NI of £622. But we’ll take that into account later.

Lastly, there’s VAT. We’ll adopt the flat rate as you can make a profit on flat rate. We’ll explain more later on but, on a typical flat rate of 14.5%, which is pretty typical for contractors, you’ll make about £1,638 each year.

Well we’re pretty much finished, so let’s draw up the comparison:

 

Umbrella
Limited
Income
63,000
63,000
Flat rate profit
-
1,638
Total income
63,000
64,638
Travelling
4,500
4,500
Pension and insurance
2,450
2,450
Fees
1,080
1,224
Other expense claims
-
2,916
Spouses wage
-
7,200
Own wage
49,212
12,000
Employers NI
5758
622
Profit
0
33,725
Tax payable
Corporation tax
0
6,745
Income tax
9,569
779
NIC
4,321
529
Employers
5,758
622
Total tax
19,648
8,675

 

So a Limited Company worker earning the same amount, with the same real expenses (don’t forget the other expenses claims are not really additional costs, just a bit more tax relief being claimed), pays an gobsmacking £10,973 less tax than an Umbrella worker, but pays slightly different fees which are negligible and could go either way in reality.

So just how much admin is worth a pay rise net of tax of over £10,000 a year? Well let’s now think of the downsides …

How hard is running a company? Well that depends on who’s there to help you.

Ok, you have to record your time. Well that’s the same as an Umbrella … and most agencies self bill, so you don’t even need to worry about raising an invoice. Not much change there.

You have to record your expenses. Sound familiar?

So what else is there that makes running a company so hard?

Well let’s list each task and look at what’s involved:

– You have to form a company. Ok there’s plenty of help out there and yes it can cost you from £35 up to a few hundred.

Probably worth spending a bit more than the basic formation fee at companies house to get the right shareholdings in place so you can plan your income and taxation. But once it’s done then that’s it.

– Oh except you need to complete accounts and send them into Companies House and then there’s something called an Annual Return and a filing fee of £14. But there again isn’t that what your accountant will do.

– The company has to run its own payroll and pay you a salary, pay HMRC taxes and all that’s pretty complicated stuff. Ok, but isn’t that what your accountant does for you, all you need to do is pay yourself, and well that’s simple enough to automate via electronic banking if your accountant gives you the amounts upfront.

So all you really need to do is agree what salary you going to take and leave it to your accountant to run your payroll, and set up payments to your private account.

– But what about the end of PAYE year returns, oh the accountants do that too. Well VAT is not easy – everyone says how bad the VAT man is. But what’s this about the flat rate scheme, and what do you mean you can make money from it. The flat rate scheme was introduced to make VAT simpler for small businesses. You charge your clients VAT, but don’t worry so does your Umbrella, but instead of paying over the full 20% added to your invoice you only pay over, typically 14.5%. In the example above the profit is £1,638 per year. Ok you can’t claim back VAT on your expenses, but let’s face it most Umbrellas don’t give you your VAT back on your expenses, even though they often claim the VAT on your expenses to reduce the VAT they pay and so enhance their fees.

– But you have to do VAT Returns, oh, no, sorry your accountant has to do your VAT Returns, well they need to earn their fee somehow…but you still have to pay the VAT collected. Well you would if you couldn’t pay by direct debit following the online submission done by your accountant.

But then we get to the hard bit… The company bank account, well that’s a lot of hassle.

After all you have to pay yourself your wages – but didn’t we just agree that could be done by standing order, your expenses, ok that varies so a monthly transfer is probably the worst that can be, then 4 direct debits to HMRC for VAT and 4 payments to HMRC for PAYE and 1 cheque to HMRC for corporation tax. But you do need to keep accounting records.

– Well, that needs to be nothing more than downloading a bank statement electronically and importing into our accounting system.

And what about Corporation Tax and company tax returns?

– Ok, so the accountants do those too…..

 

So ask yourself … why is it so complicated to run your own business as a company?

Mmmmm, we’re not sure really. Maybe you should ask an Umbrella provider to remind you of why it’s so much easier to be Umbrella. And, even if they convince you that running a company is so very hard, ask yourself honestly:

Is it not worth it for a £10,000 pay rise…?

 

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.