Umbrella companies can make it more easy to handle your tax for some of your contracts. When you use an umbrella company,you’re paid via the PAYE system,like employees are. But how does this really work,and how do the companies tax you? Here’s an explanation of how you’re taxed by umbrella companies and what that means for you.
Tax Through PAYE
PAYE stands for pay as you get if you’re not already aware. So when you use an umbrella company,you pay your tax as you earn instead of paying your tax in a lump sum after the tax season is over. Throughout the system,you will pay your income tax and National Insurance contributions. You will have a personal tax code that indicates to HMRC how much tax you should be paying. The thresholds for paying your taxes and thedifferenttax bands can change annually,so it’s always important to stay current.
Currently (2018),you’ll pay National Insurance contributions at 12 percent on earnings above #162 per week and 2 percent above #892 a week. The personal allowance for income tax is #11,850 with 20% paid on everything after up to #34,500,and 40% from #34,500 to #150,000.
Umbrella Company Expenses
Another thing to consider is that some expenses can be claimed by you. Expenses are those refunded by your client or recruitment agency. Expenses are non-chargeable,and the umbrella company will handle them when calculating your pay. Allowable expenses will be deducted from your income so thatyou don’t have to pay tax on them. If your contract with your client is deemed to be under the Supervision,Direction and Control of your client,you can not claim travel and subsistence expenses.
Calculating Your Pay
Your pay will be calculated once you have submitted timesheets to the umbrella company and recruitment agency or end client. As well as your taxes,the umbrella company will even minus your commission to the company and any other deductions,such as pension contributions and holiday pay.
Your umbrella company should send you a payslip,which details any deductions,such as taxes. At the end of the tax season,they ought to also give you a P60 for your documents too.
What About Umbrella Companies That Promise Pay?
Some umbrella companies will tell you that you can keep most your pay (up to 95%) and stillbe tax-compliant. However guidance from HMRC says that this is a warning signal for businesses that are non-compliant. You should watch out for only some of your income going through PAYE, being paid using a loan,credit or investment that the company says isn’t subject to tax,and your payments. These could be signs that the company isn’t paying your taxes correctly so it’s important to watch out for them.
Umbrella businesses deal with your tax for you thatyou don’t need to. You might pay a little more tax,but you also get the benefits of becoming an employee.