How does an Umbrella Company calculate my take home pay?
You have, no doubt, seen adverts from Umbrella Companies along the lines of ‘more take home pay’ and ‘take home 85%’; have you ever wondered how they come up with their figures?
All UK Umbrella Companies – I’ll repeat that – all UK Umbrella Companies operate PAYE. This means that you will pay your tax as you go along in exactly the same way as a permanent employee. However, and this is vitally important, ALL Umbrella Companies operate under the same rules and regulations which means that there are no magical formulas, no elaborate schemes and no creative accounting.
Your National Insurance contributions are deducted as a percentage of your earnings this percentage is identical for all companies. Income tax calculations are a little more complicated; this is essentially how it works.
Everyone has a tax code which determines their tax free pay e.g. the standard tax code for 2011/12 is 747L, which means you can earn £7475 in a year before you have to start paying income tax.
Every pound you earn over your tax free allowance will be taxed at 20% up to £35,000; every pound you earn between £35,001and £150,000 will be taxed at 40% and finally any earnings above £150,000 will then be taxed at 50%. For a more detailed guide to PAYE tax download our free guide.
That’s it, well almost. What about the impact of expenses?
The Inland Revenue is very clear about what can be claimed as an allowable expense.
Expenses reduce the amount of your taxable pay as your Umbrella Company will process them as a tax benefit e.g. earnings £400, expenses £20 = taxable pay of £380. Effectively this means that your take home pay increases but you will have had to pay out in the first place to be able to make the claim i.e. a £50 claim for a hotel bill will reduce your taxable pay by £50 but it would have lightened your wallet in the first place by the same amount.
So, to summarise, the only way your earnings can be higher with one Umbrella Company than another is if you claim more expenses through one than another. But as the amount you spend won’t change, if you move from one Umbrella Company to another it’s a bit of a moot point. You know what you have spent whilst working on your assignment and HMR&C tells you what you can claim as an expense. So what happens if you claim for something you didn’t actually pay for? In short, you will have to pay back the tax benefit that you had and HMR&C may decide to fine you as well. Well that shouldn’t add up to much should it?
£35 per day for 250 days a year at 40% = £3,500 (and that’s just the tax)
An Umbrella Company is an employment service provider and their role is to ensure that you are paid on time with as little hassle as possible and to help you understand what you can and cannot claim.
ContractorUmbrella has service guarantees, if we don’t live up to our promises to you we don't get our margin - it's as simple as that!
Interested in the net pay you can receive through an Umbrella Company? Try our online calculator for an accurate estimate.
Alternatively you can speak to a member of our team on 01206 713680 or email us on firstname.lastname@example.org.
Have you heard the phrase ‘Umbrella Company dispensation’? Not sure what it means? View our Umbrella Company Dispensations – Exposed page.