Umbrella companies can make it more easy to take care of your tax for a number of your contracts. When you use an umbrella company,you’re paid via the PAYE system,like employees are. But how does this 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 get 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 following the tax season is over. Throughout 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 tax bands can change each year,so it’s always important to stay current.
Presently (2018),you will pay National Insurance contributions at 12% on earnings above #162 a 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 is that you may claim some allowable expenses. Expenses are those refunded recruitment agency or by your customer. Other expenses are non-chargeable,and the umbrella company will manage 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 customer is deemed to be under the Supervision,Management and Control of your customer,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 customer. In addition to your taxes,the umbrella company will also minus the fee to the company and any other deductions,such as pension contributions and holiday pay.
Payslips
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 give you a P60 for your documents also.
What About Umbrella Companies That Pay?
Some umbrella companies will tell you that you can keep most your pay (up to 95%) and stillbe tax-compliant. However,official advice from HMRC says that this is a signal for non-compliant companies. 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 being routed through other companies. These could all be signs that the company isn’t paying your taxes so it’s important to watch out for them.
Umbrella companies deal with your tax for you through PAYE thatyou don’t need to. You might pay a bit more tax,but you receive the benefits of being an employee.