IT Contractor FAQs - Frequently Asked Questions

The short answer to this question is no.

Umbrella companies are obliged to apply the same PAYE tax calculations as you would pay in normal employment i.e. 20% up to £37,400 and 40% above that.

The only factor that should affect your net pay is the company's fee for its services. The only other element considered within take home pay would be expenses and what you can claim as an expense is controlled by HMRC rather than the umbrella company.

Therefore the only way an umbrella company can quote a higher take home pay than another, excluding fees, is to exaggerate the expense figure included in their calculation.

Umbrella companies who market themselves as tax saving schemes should be avoided as they can potentially leave you with a large tax bill and fine. They use misleading advertising campaigns to reel in new contractors and take advantage of the fact that they are new to the industry.

"Maximise your earnings" and "take home 85% of your income" are the usual promises made by unscrupulous umbrella companies; made possible by a "generous expense package" granted through their "HMRC approved dispensation".

What is an expenses dispensation?

A dispensation simply relieves the company from having to report every single expense processed on a P11D form. The dispensation simply gives the maximum value for an expense the umbrella company can process without having to ask for receipts. It does not mean that you can automatically claim the maximum amount - if the dispensation limit is £80 but you only spend £40, you should only claim £40!

It is your tax liability at the end of the day so if you claim for £80 and are unable to provide evidence that you have incurred that cost, it will be you that is liable for the additional tax owed and penalty to boot.

Using the example above, if you stay away from home 4 nights a week for 6 months that is £4159.98 (based on only spending £40 per night) in tax benefit that you have claimed, that you wouldn't be able to prove.

If an umbrella company is pushing un-receipted expenses, they are abusing the dispensation HMRC have granted them and run the risk of having it revoked. If this happens, they would be expected to collect receipts for EVERY expense they process.

This question was kindly answered by ContractorUmbrella Ltd.

More information

You might also be interested in our guides; how to choose a contractor umbrella company, and how umbrella companies and expense dispensations work.