One of the most common questions that I am asked is how an umbrella company can ‘maximise’ a contractors’ earnings; the answer is that it can’t. All umbrella companies operate in exactly the same way and all are governed by rules and regulations that are applied by HM Revenue and Customs.
That said, I am sure that many of you will have seen adverts promising 80% or even 85% take home pay. Sadly, unless you plough almost all your income into a pension or you have geniune expenses of 50% of more of your earnings, this will simply not be possible. Why? Well, if you are employed by an umbrella company you must, according to HMR&C legislation, be paid via PAYE which means deductions will be made for income tax and employee’s national insurance. The standard income tax rate is 20% (after allowances) and the NI rate is 11% (again, after allowances). As your umbrella company is registered as an employer it is legally obliged to pay Employer’s national insurance contributions which will be deducted from the contract rate agreed with your agency/client before your salary is paid; employer’s NI is 12.8%. Your umbrella company will also deduct a fee from your contract rate; this will range from about £20-£30 per week.
If you consider all these deductions you will realise that a promised take home pay of 85% would be virtually impossible to generate.
Employees of an umbrella company are entitled to claim business expenses. These have to be supported by receipts and they have to have been incurred wholly and exclusively as a result of the contract. The expenses are processed as a tax benefit which means that your taxable income is reduced in direct proportion to the value of the expenses. Therefore, the more that is claimed in expenses, the higher your take home pay. HOWEVER, if you claim an expense without incurring the cost you will be guilty of TAX AVOIDANCE.
ContractorUmbrella have worked out that, in order to generate a net return of 85% on their earnings, a contractor with a contract value of £300 per day would have to incur £173 per day in expenses. In other words, they would have to spend £3,748.00 per month.
If expenses are claimed through an umbrella company that are not genuine it is viewed by HMR&C as tax avoidance. Claiming for expenses you haven’t incurred will leave you in big trouble if investigated. You would be expected to pay back all the underpaid tax, a penalty usually of similar value and interest. Unfortunately ignorance isn’t bliss – you won’t be able to excuse yourself by saying you were given bad advice.
So, the moral of the story is – if it seems to be true it very probably is! If you ask an umbrella company for an estimate of your tax home pay, specify that you do not want ANY expenses included in the calculation; the only difference between quotes should then be the difference in fees (oh and, of course, service)
