Umbrella Caculation

[Rialto99]

Another one of my "this has been bugging me for quite some time" questions to all you specilist accountants out there.

I've been having a look at the way Umbrella Companies actually pay you and was wondering whether anyone could confirm once and for all the exact calculation these fine Umbrella Companies use to arrive at your net salary every week. We have a bet on in the office that i'm right, so here goes, remember there's £5 at stake here!:-

Contractor works 40 hours at £25 per hour
Accountant charges £50 per week
Expenses £100 for the week
503L Tax Code at Week 1 of the tax year

1. Gross Payment = £1,000

2. LESS Expenses = £100

3. LESS Accountants Fee = £50

4. Gross Payment after Expenses = £850

5. Employer's National Insurance on £850 = £96.38

6. Gross Payment after Expenses and Employer's National Insurance = £753.62

£753.62 is the amount that is then used to calculate the Employees Income Tax and National Insurance

7. Employee's Income Tax = £142.16

8. Employee's Nartional Insurance = £61.36

9. Net Salary payable to employee (£753.62 - £142.16 - £61.35) = £550.10

10. Take home amount is Salary (£550.10) + Expenses (£100) = £650.10


Anyone who can confirm this wins £2.50 in commision! - Cheers.....

[jh0711]

correct - although that model can be adjusted to be more compliant as at present you seem to be paying a fee - and when you join a brolly you become an employee of that brolly and an employer cannot charge you to be an employee

[Rialto99]

Cheers for the advice - but surely the accountants or 'brolly' must charge a fee otherwise how do they make there money? If they do charge the £50 in the example i've given, where does the £50 sit in the calcultion?

Thanks again....

[jh0711]

acountants can charge a fee cos that is a business to business realtionship

as to how the brollies charge a fee well - that is the trick really is not it........

[oraclesmith]

Like any other employer, they make a profit on what they bring in minus what they pay out. Eg. say you bring in £1,000 a week for them, they pay you an agreed salary of £950 a week. They are not charging you directly for your employment, they are making a small profit from your employment.

[Rialto99]

thanks again guys. Just so I've got this right in my head - is the calculation I've used correct and if we can't actually define the accountants or umbrella 'fee' as an Umbrella Fee, (1) is it still used in the calculation and (2) what do we call it?!?

[Nixon Williams]

The calculation is basicaly right although the tax & NIC amounts were not correct. Employees NIC is paid at 11% on anything over £97 pw upto £645 and 1% over £645. Employers NIC is payable at 12.8% on anything over £97 pw.

Depending upon what the expenses are depends how you will benefit. Mileage payments will be paid tax free and "increases" your income but if the expense was a train ticket this just reimburses you for a cost you have incurred. (I know you incur costs with the mileage but not necessarily at the mileage rates).

With your own company you would be able to benefit from the Flat Rate VAT scheme and lower accountancy fees, plus probably wider expenses to claim.

Alan

[oraclesmith]

Well it depends what you're trying to prove. It's just the difference between what they earn from their client for your work and what they've agreed to pay to you as a salary. In a normal business, consultant sales and payroll costs wouldn't be so closely connected like this.

You can call it their agreed or fixed profit margin if you like. They will have structured it to avoid problems with legislation intended to prevent exploitation of low paid workers.

The salary you get seems to vary from week to week depending on your expenses claims, so there should be an agreement somewhere to the effect that your total remuneration including claimed expenses will be no more than £xxx - in this case £950.

In my opinion.

[Rialto99]

OK guys, I think I'm kind of there now. I've just copied this from the contractorumbrella website calculator. Looks like they refer to their charges (£19.95) as "Fees":-

I typed in £1,000 weekly income and £100 expenses

*****************

Employers NI 89.98
Employees NI 61.73
Employee Tax 157.05
Total All Tax 308.76
Fees 19.95
Total Net Income 671.29

Our online calculator uses the standard tax code for 2006/07 - 503L and assumes that you fall inside of IR35.

*********************

Perhaps Lisa or Simon could confirm that the calculation is in fact:-

Income £1,000
LESS Expenses £100
LESS Fees £19.95
= £880.05

Employer's National Insurance on £880.05 = £89.98

Difference after Employer's National Insurance = £780.16

Employee's National Insurance and Income Tax on £780.16:-

Employee's National Insurance £61.73
Employee's Income Tax £157.05

Net Salary = Salary + Expenses £671.29


I'm pretty much done with this calculation, a simple yes or no and the £5 is mine!

Cheers

[ASB]

I think you start to go wrong at step 5. Er's NI.

Total (including Er's NI) = 850. Less 'free' (97). = 753. 753/1.128 = 667.55.

Gross Pay (for tax and NI) = 764.55
Er's NI = 97 @ 0 + 667.55 @ 12.8 = 85.45 (12.8% of the amount over 97)
Ee's NI = 97 @ 0 + 548 @ 11 + 119.55 @ 1 = 61.48
Tax = 96.82 @ 0 + 40.19 @ 10 + 582.88 @ 22 + 44.86 @ 40 = 150.10

So: Net Pay = 552.97 (764.55 - 61.48 - 150.10)

[Based on you original premise of 850 total salary including Er's NI]