Umbrella company tax
First, let’s look at umbrella contractor tax:
As an employee of an umbrella, you will receive a detailed pay statement (not to be confused with the payslip!) highlighting all umbrella employment costs and employee tax deductions.
A deduction that you may not expect to find on an umbrella contractor’s pay statement is Employers National Insurance because, well… you’re not an employer!
However, an umbrella company works slightly differently – although it is classed as an employer and is therefore subject to employers NI, it isn’t benefitting from any of the work being carried out by its workers.
And so, the employers NI is deducted from the umbrella income, before the worker’s salary is calculated.
As a side note, this is most certainly something to take into consideration when an umbrella contractor is setting or negotiating their rates of pay, because, if you were paid the same amount as a permanent employee, you would end up taking home less due to the deduction of employers NI.
Another unexpected deduction for an umbrella contractor is the Apprenticeship Levy…
What is the Apprenticeship Levy?
Designed to fund apprenticeship schemes, the Apprenticeship Levy was introduced by the government in April 2017 and allows employers to recoup some of the costs incurred by providing training for apprentices.
Each employer will receive an annual allowance of £15,000, which is offset against their Apprenticeship Levy payments – it’s not possible to carry over any unused allowance into the next tax year.
Why do umbrella company contractors need to contribute to the Apprenticeship Levy?
The Apprenticeship Levy applies to all UK companies with an annual wage bill in excess of £3m. It is a small tax charge of 0.5% of the company’s gross payroll and is paid on a monthly basis to HMRC.
Just as is the case with the employers NI, because an umbrella company is classed as an employer, the Apprenticeship Levy is another type of tax that they are liable to pay.
Tax avoidance schemes
Due to these added costs that come with working as an umbrella company contractor, it may be tempting to try and save money in other areas, which is why it’s important to be aware of tax avoidance schemes that could try to take advantage.
Of course, most umbrella companies will be compliant with tax rules, but, if you come across one that claims you’ll be able to keep more of your earnings than if you were to contract through other companies, this could be a red flag and a clear sign of an illegal scheme.
It’s never worth the risk of using one of these companies, 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.
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.