Frequently Asked Questions by IT COntractors

One of the most frequently asked questions by umbrella company contractors is how much income they will receive after all deductions have been made?

Some confusion arises from the different ways in which umbrella companies describe how the payment process works.

Umbrella company fees, for example, are either quoted gross, or net of tax, which can make the real cost of using the umbrella scheme seem lower than it really is.

Expense claims can also cause confusion, as many schemes imply that you can save tax by claiming expenses.

The golden rule is that you can only ever claim for expenses that you have genuinely incurred as a result of your contract work.

It is true that the more expenses you claim, the less tax you will pay on your income, but in the main part, you are only being reimbursed for money you have spent out of your own pocket.

HMRC governs the amount of PAYE and National Insurance Contributions you are liable for, and determines which types of expense claims are allowable.

So, in theory, the only way in which umbrella companies can differentiate themselves from each other in terms of net take home pay, is in the amount they charge contractors for using their services.

What is deducted from an umbrella contractor's contract income?

Income Tax is deducted at source, according to your personal tax code, via the PAYE (Pay As Your Earn) system. The tax code shows how much you can earn before you start paying tax. For example, the code 747L means you can earn £7,470 before you are liable for income tax.

National Insurance Contributions (NICs), are also deducted at source. The umbrella company is liable to pay Employers' NICs on the value of your contract rate. You are personally liable for Employees' NICs on your salary.

Any allowable expenses will be returned to you before tax is applied.

The umbrella company will also deduct their pre-agreed weekly or monthly fee.

If your umbrella company has a pension scheme in place, you can elect to invest some of your salary into the scheme completely free of income tax and NICs - this is known as 'salary sacrifice', and represents one of the few remaining tax breaks available to contractors.

Further Information

Parasol Umbrella have launched a new net take home pay calculator - visit their website and click on 'Calculator'.

Our dedicated umbrella company section - here.