Umbrella companies can make it easier to take care of 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 really work,and how can 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 earn if you’re not already aware. So once 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 finished. Throughout the system,you may 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 differenttax bands can change annually,so it’s always important to stay up to date.
Presently (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 thing to consider is that some expenses that are allowable can be claimed by you. Expenses are those refunded by your client or recruitment agency. Other expenses are non-chargeable,and the umbrella company will manage them when calculating your pay. Expenses will be deducted from your income so thatyou do not have to pay tax on them. If your contract with your client is deemed to be under the Supervision,Management and Control of your client,you can not claim travel and subsistence expenses.
Calculating Your Pay
Your pay will be calculated after you have submitted timesheets to the umbrella company and recruiting agency or end client. In addition to your taxes,the umbrella company will even minus your commission to the company and any deductions,such as vacation and pension contributions pay.
Your umbrella company should send you a payslip,which details any deductions,such as taxes. At the close of the tax year,they ought to give you a P60 for your documents.
What About Umbrella Companies That Promise Pay?
Some umbrella companies will tell you that you could keep the majority of your cover (up to 95 percent) and be tax-compliant. However advice from HMRC claims that this is a signal for businesses. You should also look out for only some of your income going being compensated using a loan,investment or credit that the company says is not subject to tax,and your payments being routed through other businesses. These could be signs that the company isn’t paying your taxes so it’s important to watch out for them.
Umbrella businesses deal with your tax for you through PAYE so thatyou don’t have to. You might pay a bit more tax,but you also receive the benefits of becoming an employee.