How Does Umbrella Contractor Tax Work?

(3 minutes to read)

The way in which umbrella tax works is unique compared to other methods of contracting and this is because of the fact that although the contractor will reap many of the benefits associated with self-employment, they are still technically employed – by their umbrella company.

Umbrella company tax

As an umbrella contractor, you will pay all of the same taxes that a permanent worker would (plus a couple of others, which will be discussed later on) as PAYE – Pay As You Earn, which means that you will pay your tax as you go along.

The umbrella company will provide their contractor with a payslip, then calculate and deduct any income tax and National Insurance Contributions (NICs) due, as well as administration costs.

Your payslip will include your contract pay (before and after any deductions), the number of hours you’ve worked and the amount of deductions.

What specific taxes do umbrella contractors pay?

As mentioned previously, there are a couple of additional taxes that umbrella contractors need to pay because of the setup between a contractor and their umbrella.

As an employer, an umbrella company will be responsible for paying certain taxes – namely employers National Insurance (NI) and the Apprenticeship Levy.

However, as the umbrella doesn’t benefit from the contractor’s work in the same way as a standard employer does, these additional taxes are then passed on to the contractor to pay.

Employers NI is calculated at the current rate and should be presented on the umbrella contractor’s payslip.

As should the Apprenticeship Levy – this is designed to fund apprenticeship schemes and allows employers to recoup some of the costs incurred by providing training for apprentices.

It applies to all UK companies with an annual wage bill in excess of £3m and is a small tax charge of 0.5% of the company’s gross payroll.

Tax avoidance schemes

Currently, HMRC is running a ‘Tax Avoidance – Don’t Get Caught Out’ campaign in order to warn the public not to get involved with such organisations, and for the first time, HMRC have the power to name these schemes.

The list (which keeps growing) includes tax avoidance schemes, promoters, enablers and suppliers.

If you find out that you are involved with any of these named schemes, or you suspect that there may be non-compliance happening with your umbrella then you should contact HMRC as soon as possible by reporting it via an online form on the GOV.UK website.

It may be tempting when a firm is offering you more of your take home pay compared to other companies, but it’s never worth the risk, so make sure that when looking for an umbrella company, you check their credentials and reviews, and get as much information on them as you can before fully committing.

Contractor Umbrella

Hassle-free and straight talking, Contractor Umbrella has been helping contractors since 2002 and is now one of the most trusted umbrella companies in the UK guaranteeing peace of mind, absolute compliance and complete security for all its employees.

Award-winning, Contractor Umbrella is one of the longest-standing and most respected umbrella companies in the UK and is both fully FCSA accredited and an APSCo Trusted Partner

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