Tax Deductible Umbrella Company Expenses

When working through an umbrella company, understanding your tax-deductible expenses is key to keeping more of your hard-earned money. Many contractors in the UK choose to work through umbrella companies because it simplifies employment. However, if you’re not aware of which expenses you can legally deduct, you might be missing out on valuable savings.

Knowing what you can claim as tax-deductible umbrella company expenses can make a big difference in your take-home pay. Tax-deductible expenses reduce your taxable income, meaning you pay less tax and keep more of your earnings. As a contractor working through an umbrella company, there are specific rules about what expenses you can claim, and it's important to follow them to stay within HMRC guidelines.

By understanding these expenses, you can save money and improve your tax efficiency, which ultimately helps you get the most out of your contracts.

When you work through an umbrella company, there are a few types of expenses you may be able to claim for:

Client Billable Expenses

These expenses are agreed upon prior to the engagement, and are paid for by the end client or agency. 

Business Costs

Business costs are expenses that are necessary for the performance of your work. 

Examples include professional materials (such as textbooks and manuals), training costs, protective clothing, business equipment, computer software, mileage, parking fees and more. These will be reimbursed tax and NICs free by your umbrella company. 

Non-client Billable Business Expenses

These expenses won’t be reimbursed by the end client or agency, but can be claimed as allowable expenses from HMRC—provided that the expenses are incurred “wholly, exclusively and necessarily” in the performance of your work. 

Here are some examples of allowable expenses you can claim for: 

• Mileage
• Professional subscriptions
• Protective clothing
• Stationery, postage, phone and internet 
• Business entertainment

Introduced in April 2016, the SDC legislation was implemented to level the playing field between permanent employees and contractors or freelancers in relation to travel and subsistence expense rules. 

Agency Legislation focuses on "Supervision, Direction, or Control" to determine whether a worker is considered an employee or self-employed. This means that if an employer supervises how, when, and where the work is done, gives specific directions on tasks, or maintains control over the worker's activities, then they are likely to be classified as an employee rather than self-employed. This distinction is important for tax and employment rights purposes.

If a contractor is deemed to be under SDC, he or she won’t be able to claim tax relief on home-to-work travel and subsistence expenses. 

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SDC is defined as:

• Supervision: Supervision means watching over someone while they work to make sure they're doing it right and up to the required standards. It can also involve helping them improve their skills.
• Direction: Direction is when someone tells another person how to do their work, giving them instructions or advice on the best way to do it. The person giving direction often organizes how the work is carried out.
• Control: Control is when someone decides what work a person does and how they do it. It also involves having the authority to assign them to different tasks.

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If you’re subject to SDC, you won’t be able to claim home-to-work travel and subsistence expenses. Bear in mind that expenses incurred during an assignment, such as an occasional trip to a different workplace (detached duty travel) aren’t affected by the SDC legislation.

What are Travel and Subsistence Expenses?

Subsistence expenses refer to expenses for meals and other necessities incurred while an employee is away from a permanent workplace. 

These include expenses for food and drinks, accommodation, business phone calls, parking charges, tolls, mileage and other costs of travelling. 

Travel expenses are expenses incurred for: 

• Travelling that is required for a contractor to perform his or her assignment
• Trips made to and from a workplace (excluding normal commuting)
• Trips made to and from a temporary workplace 

Detached Duty or Inter-Site Travel:

Also known as mobile working, detached duty or inter-site travel refers to situations where you are required to work at different locations. If you usually work in one place but your client sends you to another location temporarily, HMRC might let you claim a tax deduction for the costs of traveling and living while you're there. You'll get the same tax benefits as a regular employee sent to a temporary workplace.

The type of expenses that you may be able to claim when travelling to a temporary worksite are:

• Mileage and associated costs (tolls, parking, etc.)
• Public transport (bus, train, taxi, air fares, etc.)
• Car hire and fuel costs
• Accommodation (hotels, B&Bs, rental properties and utilities, etc.)
• Meal expenses (evening meals, lunch, breakfast, etc.)

Make sure to keep detailed records to substantiate your claim

Are There Exceptions to the Rule?

The rule doesn’t apply if a worker’s services are provided wholly in the end client’s own home—such as when a contractor provides gardening or cleaning services in the home of a client. 

And if you’re under SDC, but are a mobile worker, you’ll be able to claim mileage for travel from one appointment to another. A mobile worker refers to an individual who works in multiple locations, works away from their normal workplace or doesn’t have a fixed workplace. 

What Expenses can I Claim for If I’m not Subject to SDC?

You’ll be able to claim for the client billable, business costs and non-client billable business expenses we’ve outlined above. 

Additionally, each of your workplaces will be considered a temporary worksite. This means that you’ll be able to claim travel and subsistence expenses, provided that these are incurred wholly, exclusively and necessarily for the performance of your work.

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Understanding umbrella company expenses is vital for any contractor navigating the UK's contracting landscape. While there are restrictions and considerations to keep in mind, the convenience, flexibility, and overall support offered by umbrella companies make them a compelling choice for many professionals. However, it's crucial to stay informed, especially in the ever-evolving world of taxation and employment regulations.

For personalized advice and seamless financial management, consider enlisting the services of contractor accountants. Their expertise in understanding the complexity of contractor finances can ensure you make the most of your contracting journey.

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How do I determine my SDC status? 

Your SDC status will be assessed by your umbrella company before the start of each assignment. 

In general, your provider should have a compliance team who will obtain information through a questionnaire about various aspects of your assignment—such as the level of experience needed, the level of supervision required and the amount of information or advice that will be provided. 

Your provider will then determine your SDC status, and provide recommendations about moving forward with the assignment. 

What’s the process for making expense claims?

Generally, you’ll be asked to upload expenses claims on a weekly or monthly basis, and your provider will reimburse client billable expenses and business costs. You may claim tax relief on-client billable expenses via Self Assessment tax return or the P87 form at the end of the tax year. 

Your umbrella company will have a process in place for handling expense claims. The process may vary across different providers; some may provide assistance or complete the necessary tax forms on your behalf—so this is something you’ll want to clarify when you’re speaking with a prospective umbrella company. 

What are record keeping requirements I need to know? 

Your umbrella company will require receipts or other evidence for expenses claims, so you’ll need to keep full records of your expenses. 

Additionally, these records should be kept for a minimum of six years, as you’ll need to show proof of your expenses in the event of an HMRC investigation. 

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