Since this page was written there have been some crucial changes. It is important to note that as of the 6th April 2016, changes in legislation (as part of the Finance Act 2016) mean that it will not be possible for a compliant umbrella company to process chargeable expenses for the purpose of tax relief.
Most people assume that only limited company contractors can claim expenses as part of their contracting but this is not quite true. Umbrella company contractors can also help to minimise their tax bill through allowances and some exemptions, so long as they qualify under the following rule: “That an employee or office holder may deduct expenses incurred wholly, exclusively and necessarily in performing their duties.”
On that basis the following expenses are worth considering:
Contractors are permitted to claim for the cost of their travel to and from their temporary places of work. Under these circumstances, the mileage rates they are allowed are 45 pence per mile for their first 10,000 miles during any fiscal year. Thereafter it drops to 25 pence per mile. The purpose of this allowance is so that it will cover both the running costs and the fuel costs of a vehicle. Furthermore, should a contractor be travelling to work merely as a passenger in a vehicle then they can still nevertheless claim 5 pence per mile. It is also permitted to claim for congestion charges and parking charges. However, you are not allowed to make a claim for speeding fines or for parking fines. Additionally, it is possible to claim for the cost of travelling via public transport, but you will need valid receipts. And lastly, similar rules apply to travelling by motorcycle and bicycle at mileage rates of 24 pence per mile and 20 pence per mile.
Accommodation, Food and Drinks Expenses
Contractors can also claim expenses for the cost of hotels or bed and breakfast accommodation. They are also allowed to make a claim for ‘reasonable’ costs of any additional meals that are had whilst using that overnight accommodation. There are no set prices or allowances when it comes to the cost of the accommodation but again it must be deemed ‘reasonable.’
For contractors, any protective clothing that is worn every day in the performance of their work may be claimed as an expense. You are also permitted to claim for any clothing that is required for the execution of your contract and which would not reasonably be worn outside of working that contract. However, it is not permitted to claim for any ordinary or day to day clothing which could be seen to be part of an ‘every day’ wardrobe, even supposing you would not wear it anywhere other than at work. And you are not permitted to make a claim for any alterations to your working clothes or for any dry-cleaning costs.
Contractor Training Expenses
One area where contractors really should take advantage of the expenses rules is career training. That’s because any training related to your contracting career and your specialty can be put down as an expense. There are guidelines of course, (as mentioned above) that expenses must be ‘incurred wholly, exclusively and necessarily in performing their duties.’ Which means that the training must be wholly and completely relevant to your performance of your contracts. And by that they mean the current contract – it is not quite enough for the training to be merely relevant to that job or to be taken on ‘in connection with’ your general duties of your job.
You are permitted by the Inland Revenue to claim back the costs of any subscriptions to industry societies, groups, learned bodies or professional bodies.
It is possible to make claims for expenses related to equipment but they must, of course, be supported by proof that the equipment is specifically required for the performance of your current contract and proof that the equipment is completely necessary in order for you to fulfil that current assignment. It is not possible to claim for general bits of equipment that would help your career or which would be ‘nice to have!’
Another good area for contractors (one of the few) when it comes to expenses is contractor pensions. Indeed they represent one of the last remaining tax breaks that contractors have. With that in mind it is well worth taking as much advantage as you possibly can! Contractors are permitted to invest part of their income into pensions schemes and this is then processed as a tax benefit for the contractor. They not only make savings on the income tax that would have been payable, but also, thanks to their pension contribution, will have lower employee and employer National Insurance contributions.
Payroll Giving Expenses
What exactly is payroll giving? It refers to a scheme that permits you to make flexible donations to any UK charities out of your gross salary. And this then means that you will get immediate tax relief on that donation whilst also making a contribution to a good cause.