If you are considering joining an umbrella company, what will be deducted from your gross earnings, and how do you calculate your net take home pay?
All UK PAYE (Pay As You Earn) umbrella schemes operate in the same way. The same tax and National Insurance rules apply to all umbrella companies, and expenses can only be claimed if they have been incurred legitimately. In fact, the only way firms can compete is in any ‘extras’ they provide their workers (health insurance, business insurance, vouchers, etc.), and in how much they charge to use their services.
When it comes to comparing the real cost of using an umbrella company, it is important to compare like with like. Some firms quote their gross fees, and others their net fees (how much you will actually pay after claiming the costs of the umbrella fees against tax). Other firms may claim that you can legitimately claim expenses to increase your net take home pay. In reality, you can only ever claim for expenses that you have genuinely incurred as a result of your contract duties.
Working out your net take home pay
From receiving your contract earnings, to depositing your weekly/monthly pay in your bank account, all PAYE umbrella companies operate in fundamentally the same way. Deductions are made as follows:
1. Contract income is received by the umbrella company, from the recruitment agency, or end client direct.
2. Any expenses you are owed will be reimbursed to you (there is no tax benefit to you, as the umbrella is merely returning money to you that you have already spent).
3. Any other deductions will be made, such as contributions to a pension scheme.
4. Your umbrella will also deduct their pre-agreed weekly or monthly fee for processing your income.
5. The remaining income is then taxed at source. PAYE (income tax) and NICs (National Insurance Contributions) are deducted each month, and paid directly to HMRC on your behalf.
6. You will receive a payslip showing your gross income, deductions, tax and NICs, and net take home pay.
Contractor umbrella calculator resources
- Try Contractor Calculator’s umbrella calculator to see how typical deductions will affect your net take home pay.
- Try some of the leading umbrella company websites for example calculations, including Parasol (click ‘Calculator’ in the top menu) and Contractor Umbrella.
- How to compare umbrella companies
- How to choose an umbrella company – 10 Tips
- Claiming home office expenses from your company
- Running a limited company from home
- Professional Indemnity insurance for umbrella company contractors
- ClearSky Accounting - specialist support for contractors
- Visit Hiscox for Professional Indemnity and Business Liability Insurance
- Contractor Finance - up to £30,000, when you need it
- InTouch Contractor Accountants - Personal Online Accounting
- Join PCG - Free impartial start-up advice for contractors.
- Visit Qdos Consulting for tax investigation cover and IR35 insurance.
- 90% Pay Retention for Contractors - Helix Management Ltd