Expenses - better going umbrella than self employed?

[Hemingfield]

Hiya,

Am I right in thinking that if you work under an umbrella company you can claim back expenses (travel, hotels, food, etc) without limit - providing you stay within the rules, whereas working under your own Ltd company - claiming expenses reduces taxes but reduces your take-home pay also?

Eg1 Ltd company: £5k per month - min salary - rest as dividend - no expenses

Monthly Income : £5,000
Monthly Salary : £435.42 (min wage)
Expenses : £0

Total Profit : £4,564.58 (£5,000-£435.42)
Corp Tax : £912.92 (£4,564.58*0.2)
Left for Divs : £3,651.66 (£4,564.58-£912.92)

@Tax Free : £2,339.58
@High Tax to be taxed : £1,312.08 (£3,651.66-£2,339.58)
@High Tax @ 25% : £328.02 tax
@High Tax whats left : £984.06 (£1,312.08 - £328.02)

Take home pay : £3,759.06 (£435.42 + £2,339.58 + 984.06)
Total Tax : £1,241 (£328.02 + £912.92)


Eg2 Ltd company: £5k per month - min salary - rest as dividend - £1000 expenses

Monthly Income : £5,000
Monthly Salary : £435.42 (min wage)
Expenses : £1000

Total Profit : £3,564.58 (£5,000-£435.42-£1,000)
Corp Tax : £712.92 (£3,564.58*0.2)
Left for Divs : £2,851.66 (£3,564.58-£712.92)

@Tax Free : £2,339.58
@High Tax to be taxed : £512.08 (£2,851.66-£2,339.58)
@High Tax @ 25% : £128.02 tax
@High Tax whats left : £384.06 (£512.08 - £128.02)

Take home pay : £3,159.06 (£435.42 + £2,339.58 + 384.06)
Total Tax : £840.94 (£128.02 + £712.92)


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Please tell me my formula is missing something!

Cheers

Hem

[minstrel]

Please tell me my formula is missing something!

Yes - you are missing the fact that you would have reimbursed yourself the £1000, so you take home the expenses route would be £3,159.06 + £1,000 = £4,159.06 (assuming all your other calculations are correct - which I haven't checked).

[Sockpuppet]

You're numbers are wrong. Corp tax would be a £1000 lower as the expenses would bring it down.

Are you talking about expenses incurred or are you talking about claiming for £26 subsistence in which case its a moot point as its can't be done (legally).

[LisaContractorUmbrella]

If your contract falls outside IR35 (per your illustration) you will definitely be financially better off working through your own Limited Company than through an umbrella company.

[minstrel]

You're numbers are wrong. Corp tax would be a £1000 lower as the expenses would bring it down.

£1,000 expenses doesn't reduce CT by £1,000 it reduces it by £200 which is what the OP had in the calculation.

[NotAllThere]

Hiya,

Am I right in thinking that if you work under an umbrella company you can claim back expenses (travel, hotels, food, etc) without limit - providing you stay within the rules, whereas working under your own Ltd company - claiming expenses reduces taxes but reduces your take-home pay also?

No.

The expenses you get back from the umbrella company come out of your fee.

[Sockpuppet]

£1,000 expenses doesn't reduce CT by £1,000 it reduces it by £200 which is what the OP had in the calculation.

Oh yeah..wasn't looking.

[LisaContractorUmbrella]

Expenses through an umbrella company are processed in two ways - they are either chargeable to the client in which case they are added to the invoice for the work that you do and are reimbursed in full - or they are processed as a tax benefit. Genuine expenses reduce your tax liability which is why there is a common assumption that they somehow 'increase' your tax home pay; people seem to forget that the cost has to be incurred in the first place.

[Hemingfield]

Thanks for the feedback.

It is actually starting to make sense.

minstrel - you put the rug back under my feet!

[TheFaQQer]

But everyone knows that umbrella companies have a magic piece of paper which means that you can claim anything you want, whether you have spent the money or not, with no receipts and no comeback. So fill your boots.

Or is that fraud I'm thinking of?