If you’re a contractor or pay self employed tax, you run the risk of paying considerably more self employed tax than you need to. By establishing an umbrella company you will be able simplify the processes through which you are remunerated for your expertise, and claim lots of everyday costs against tax .
For example, if you were a consultant hired by a pharmaceutical company on a self employed basis, you could choose to create an umbrella company which could then hire you on a full time basis, and be remunerated for your work by the company to which you are contracted. The umbrella company can then pay you as a permanent member of staff rather than as a self employed person . Through the umbrella company you could also, and very easily, declare your business costs as expenses, which the umbrella company would be able to treat as operating costs, deducting them from the moneys received from the company to which you’re contracted before you are paid, and crucially, before you are taxed .
The expenses that the umbrella company might be able to deduct from your self employed tax in this manner could cover travel expenses , your wifi at home if you have a home office. You could also choose to have your umbrella company provide you with a company automobile and business telephone , and to these benefits could be written down against your tax bill and will therefore end up saving you money .
The advantages of setting up an umbrella company
This third party is then remunerated by the umbrella company, rather than paying self employed tax. The money paid to this other “employee” is really a part of the salary paid to the contractor by the contracting company, but by distributing this money between two directors of the umbrella company they are able to benefit from the untaxed income or “personal allowance” to which we’re all entitled, with the first portion of their salary (currently the first ?7,475, rising in 2012/13 to ?8,105, with an additional increase included in in the March 2012 budget) going untaxed.