How are you currently taxed by umbrella companies

Umbrella companies can make it more easy to handle your tax for a number of your contracts. When you use an umbrella company,you’re compensated via the PAYE system,like employees are. But how does this actually work,and how do the companies tax you? Here is an explanation of how you’re taxed by umbrella companies and what that means for you.

Tax Through PAYE

If you’re not already aware,PAYE stands for pay as you get. 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 year is over. Through the system,you will pay your income tax and National Insurance contributions,assuming that you’re earning enough. You’ll have a tax code which 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 up to date.

Currently (2018),you’ll pay National Insurance contributions at 12% on earnings above #162 per week and 2 percent above #892 per 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 aspect to consider is that you can claim some expenses that are allowable. Expenses are those reimbursed recruitment agency or by your client. Other 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’t claim travel and subsistence expenses.

Calculating Your Pay

Your pay will be calculated after you have submitted timesheets into the umbrella company and recruiting agency or end client. As well as your taxes,the umbrella company will even minus the commission to the company and any deductions,such as pension contributions and vacation pay.

Payslips

Your umbrella company should send you a payslip,which details any deductions,including taxes. At the close of the tax year,they should also give you a P60 for your records.

What About Umbrella Companies That Pay?

Some umbrella companies will tell you that you can keep the majority of your pay (up to 95 percent) and be tax-compliant. However advice from HMRC says that this is a warning sign for businesses that are non-compliant. You should also look out for only a portion of your income going through PAYE, being compensated with a loan,credit or investment that the company says isn’t subject to tax,and your obligations being routed through other businesses. These could all 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 tax,but you also receive the benefits of being an employee.

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