Is your Umbrella Company fit for purpose?

If it isn't offering salary sacrifice then it isn't. Contractors using any Umbrella Company should be able to take maximum advantage of salary sacrifice to massively reduce their tax bill but sadly there are still too many providers who have yet to put these lucrative arrangements in place for their clients.

Given the effects of IR35, MSC clampdowns and challenges to income shifting many Contractors now prefer the relatively hassle free route of working through an Umbrella Company. One of the downsides of the Umbrella route is that a far greater proportion of your contract income will invariably be lost to income tax, employers and employees National Insurance but at ContractorFinancials we stress that this doesn't have to be the case.

The solution

Using a so called salary sacrifice arrangement means that you suffer no deductions by the taxman whatsoever and the whole thing comes with the active encouragement of HMRC!

We simply ask your payroll department to transfer a proportion of your invoice into a pension scheme on your behalf. Salary sacrifice represents the most effective way of getting money from contract and into personal hands as the taxman doesn't get a penny of your hard earned cash.

As this form of investment allows your Umbrella Company to transfer funds directly from your contract income into a pension scheme this transfer occurs before the Employers or Employees National Insurance and Income Taxes have been deducted which, even for a basic rate tax payer, could save the equivalent of a 38% tax take. Higher rate taxpayers save even more.

Why is the taxman so uncharacteristically generous?

Unlike other forms of tax planning, salary sacrifice is completely non-contenscious in the eyes of the taxman. This is because increasingly the state is telling individuals that they must take responsibility for their own financial well-being in retirement.

The government makes dire predictions of future state provision struggling to cope with the twin challenges of a shrinking workforce and ageing population. If we're going to be largely on our own when it comes to future provision of pension income then the taxman can hardly prevent Contractors from exploiting to the full the freedoms brought about by pensions simplification. We have clients who transfer virtually all of their income into a pension avoiding all tax on their contract.

Whilst the amount that you contribute will depend on your unique circumstances and could be dictated by financial commitments transferring as much as possible out of the hands of the taxman now could also make a very significant difference to your pension pot.

If you can rely on , say, investments or a partner's income then it might be worth trying to contribute a higher proportion during your time as a Contractor in order to save the tax that you would otherwise be paying. Avoiding a higher taxable salary now could guarantee financial security for the future.

Check your umbrella before you go

So with HMRC getting tough on Contractors and tax breaks becoming few and far between, it would be foolish to ignore the opportunity for savings that salary sacrifice offers but sadly some Umbrella schemes have not yet woken up to the great benefit that these schemes represent to their clients.

Help is at hand...

If your Umbrella Company doesn't offer you the opportunity to take advantage of a salary sacrifice scheme, then we can liaise with them to put a suitable scheme in place. It doesn't have to mean switching Umbrella's, the scheme is simple to set up and could be up and running in a matter of weeks, enabling you and your colleagues to take advantage of the massive tax savings available.

As the Umbrella Company contributes on your behalf, investing in your pension via salary sacrifice is stress free and allows you to contribute a much higher percentage of your income than you can do personally.

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