What types of tax do you pay under an umbrella company?
As an umbrella company contractor, you are essentially employed by your umbrella company, which means that you are given a payslip with the tax you owe already deducted, like permanent employees.
All UK umbrella companies operate PAYE (Pay As You Earn), so, just as a permanent employer would, you will pay your tax as you go along.
However, the other main taxes you’ll see in your documents, but won’t necessarily be paying yourself (as your umbrella employer will be paying these) are:
Employers National Insurance
Due to your umbrella company being your employer, employers NI falls on the company to pay for, however, this arrangement differs to a standard permanent employer because the umbrella company is not benefitting from any of the work carried out.
This means that the employers NI will come from the umbrella income, before the worker’s salary is calculated.
Currently (2023/24) employers NI is calculated at 13.8% on earnings above £175 per week, or £758 if paid monthly.
It’s worth noting that this is something to take into consideration when negotiating your rates of pay. For example, if you were to accept the same rate you’d get as a permanent employee, you would actually be taking home less money because of the deduction of employers NI.
Introduced by the government in April 2017, the Apprenticeship Levy is designed to fund apprenticeship schemes, allowing employers to recoup some of the costs incurred by providing training to apprentices.
The Apprenticeship Levy is a small tax charge payable by all companies with an annual wage bill in excess of £3m – the tax is 0.5% of the company’s gross payroll and is paid to HMRC alongside income tax and NI.
Once again, as umbrella companies are employers, this is another tax they are liable to pay. This amount will also appear on the umbrella contractor’s payment summary alongside other statutory costs.
If you’d like to read more on how to understand your payslip, take a look at our page Your Payslip Explained.
Tax avoidance schemes
On the subject of tax, it’s absolutely vital that as a self-employed/umbrella professional you are aware of any potential tax avoidance schemes.
If an umbrella company claims that you’ll be able to keep more of your earnings compared to other companies, this may be a red flag that it is working as a tax avoidance scheme.
Most umbrella companies will be legitimate and compliant with tax rules, but it’s important to look out for other warning signs, such as:
- If there’s a third party in the chain making the payment.
- If you’re asked to sign an annuity, loan or other agreement which involves a non-taxable element of pay.
It’s not worth the risk using one of these companies – if you are caught using a tax avoidance scheme you’ll have to pay the tax that you owe, plus interest and even a penalty.
If you suspect that there may be non-compliance happening then you should contact HMRC as soon as possible by reporting it via an online form on the GOV.UK website.
For more information, read our What is a loan scheme and why you shouldn’t use one page.