A question about tax and contracting. Very confused so please help.

[hi_robb]

Morning folks,

Many thanks for the helpful answers. While the employer NI came as a bit of a shock, I did understand the paye tax and expenses being tax offset bits, it was just the way payroll and tax calculations actually worked which was confusing me.

Went to the "inland rob them all" website and read through the info on how to calculate payslips which gave me the answers I needed. (as well as the info on here which confirms I've understood it correctly).

Looks like I'll be taxed at the 22% rate for this contract.

I've also called my umbrella and found out what I can and can't claim. I do realise though it is important to get that bit right. The last thing I want is to get done for fraud by the revenue.

I'm not out to evade paying what I owe, I've always paid my taxes and worked. However, it would be pretty stupid if I'm actually paying £250 a week travel expenses and can get that tax offset, not to do so. That's after all one of the benefits of contracting is it not?

Once again, many thanks for the helpful replies.

Dave

[LisaContractorUmbrella]

Good morning,

I need some advice from you. I've just got a short 3 month IT contract down in the south west and start next Monday. As it is only 3 months, I have registered with an umbrella company to save hassle and costs of setting up a limited company.

I'm going to be staying with family down there and will travel in to work from theirs on the train each day.

I will be getting paid a rate of £350 per day.

Great I thought until a few minutes ago when I was looking at what take home wages I can expect. It then got very confusing.

Looking at the umbrella companies website, it turns out I will have to pay from my net pay the 12.8% employers national insurance contributions. This was a bit of a shock, but on the good side it also seems I can claim expenses. In this case, £5 per day food, £25 per day accommodation as I'm staying with family, and of course my travel.

The expenses are class e??? which means they aren't actually claimed back but the amount in total is offset against your net pay. So if my expenses are £1000, and my monthly pay pre tax etc would be £7000, then my taxable income is only £6000.

Hopefully so far I have managed to understand all that ok.

The next part gets us though. If we are understanding things correctly I'm going to get taxed at the following rates weekly

upto first £100 = 0% tax
next £42 = 10% tax
between £142 and up to £622.50 = 22% tax
Anything over = 40%

As a significant part of my wages will be above £622 it appears that I will get taxed at 40%.

Now the bit I don't understand. What happens if so far in total (including what I will earn from this contract), my income would not go near the level required in a year to hit the 40% tax bracket?

For example, lets just say so far in this tax year (all on PAYE taxation), my net pay has been 5k. With the contract money in the next 3 months I would still only be at around 26k which is way below the 40% tax bracket.

Do I claim it back? Or will it just sort itsself as they will know I haven't earned enough to hit the 40% bracket?

The other thing which is confusing us is it appears I will have to fill in a self assesment, even though I will be PAYE tax, is this right?

Can someone shed some light on all this for us, our brains are fried. And if possible, can someone give us a rough guestimate as to what my monthly take home pay for the next 3 months will be. Assuming a standard tax code and expenses (class e) of £1000, and £350 a day rates?

Many many thanks.

Dave

Hi Dave,

As a couple of guys here have said, your umbrella company should be able to answer all of these questions for you. If you work through an umbrella company you are paid PAYE, which means Pay As You Earn, and you pay your tax as you go along. The Inland Revenue have a record of your earnings for the financial year to date as this information is recorded on your P45 which is produced each time you leave a job and move onto the next one. When your umbrella company receive your P45 they will add the figures to their payroll system which will then give them a record of your earnings and your taxable pay year to date; the earnings that they process for you will be added to these figures giving a cummulative figure for your taxable pay for each period. Your income tax is then calculated according to the bands that you mentioned - ranging from 10% to 40%.

You shouldn't have to fill in a self-assesment form, unless you will be receiving income from another source, as you will be treated as an employee of the umbrella company.

HTH

[TheFaQQer]

on the good side it also seems I can claim expenses. In this case, £5 per day food, £25 per day accommodation as I'm staying with family, and of course my travel.

Oh dear.


You can only claim expenses for what you have actually spent, and you need to keep a receipt for it. Just because the umbrella company may not ask to see the receipt, does not mean that you don't need one.

If you claim expenses that you do not actually incur (which some umbrella companies seem to encourage people to do), then in the event of an investigation, you are going to be royally reamed.

Big style.

[MobileCheese]

edited

[xoggoth]

Not really sure about umbrellas but it seems you are being taxed assuming your annual income is 52*weekly income. If you don't work a year you should get it back but it beats me why they can't use another basis. Should not be really necessary to do a tax return if you have overpaid tax, you can write setting out the details and requesting a refund. Used to be able to anyway.

[malvolio]

What they said....

It is all fairly straightforward, and there are checks and balances. But at the end of the day, you are totally responsible for your own actions so learn what the rules are.

And BTW, the bit about expenses is f***ing serious - get it wrong and that's evasion, which is 6 years in jail. Be very sure you know what you're doing, and why.

[MrRobin]

Your umbrella should taper your tax according the amount you have already earnt this year (from your P45).

Below is the output of a spreadsheet I made ages ago to compare inside and outside IR35 net take home pays. HTH.


Rates to invoice
Contractor Daily Rate £350.00
Number of days worked 21
Hours Per Day 7


Company Accounts
Company Monthly Income (21 days work) £7,350.00
Expenses (5%, travel, etc etc) -£567.50
Your Wage -£5,965.20
Employers NI (12.8% of wage over threshold) -£817.30
Company Profits £0.00
Coorporation Tax (20%) £0.00
Dividend Available £0.00


Contractor Accounts
Your Gross Monthly Wage £5,965.20
Tax
No Tax £0.00
10% -£18.33
22% -£583.00
40% -£1,078.58
Your PAYE Tax -£1,679.91
NI
No NI £0.00
11% -£263.12
1% -£32.14
Your Nat Insurance -£295.26


Payment to YOU
Net Salary £3,990.03
Expenses Back £567.50
Dividend £0.00
Net Payment! £4,557.53

[ctdctd]

Bascially, you haven't really done any research, you have no idea about tax management and none at all about allowable expenses. I suggest you do some learning before you get into real trouble. The stickies on this forum and the first-timer guides on here and on www.pcg.org.uk are required reading. Then come abck with the bits you still don't understand.

Ouch

Glad it wasn't me who asked!

To the OP - tax will sort itself out either with your next brolly contract or when you request an SA tax form at the end of the tax year - if you don't already get one. As malvolio says, ask the brolly the questions about your take home on the current contract - make 'em work.

[malvolio]

If you don't fill in a self-assessment form, how will the taxman know to pay you back any over-paid tax?

Secondly, why not ask your umbrella - you're paying them to manage your income, they are best placed to explain their accounting conventions.

Thirdly, you are a contractor (of a sort), so who else is going to pay employer's NIs for you?

Fourthly, you can't claim expenses you haven't paid out. For example, why should you get £25 of my tax because you're staying with friends? Are you paying them £25 a day for the bed?

Fifthly, had you gone to the trouble of setting up your own company you would be about 20% better off, and wouldn't be paying 40% tax until you'd earned enough to do so.


Bascially, you haven't really done any research, you have no idea about tax management and none at all about allowable expenses. I suggest you do some learning before you get into real trouble. The stickies on this forum and the first-timer guides on here and on www.pcg.org.uk are required reading. Then come abck with the bits you still don't understand.

[hi_robb]

Good morning,

I need some advice from you. I've just got a short 3 month IT contract down in the south west and start next Monday. As it is only 3 months, I have registered with an umbrella company to save hassle and costs of setting up a limited company.

I'm going to be staying with family down there and will travel in to work from theirs on the train each day.

I will be getting paid a rate of £350 per day.

Great I thought until a few minutes ago when I was looking at what take home wages I can expect. It then got very confusing.

Looking at the umbrella companies website, it turns out I will have to pay from my net pay the 12.8% employers national insurance contributions. This was a bit of a shock, but on the good side it also seems I can claim expenses. In this case, £5 per day food, £25 per day accommodation as I'm staying with family, and of course my travel.

The expenses are class e??? which means they aren't actually claimed back but the amount in total is offset against your net pay. So if my expenses are £1000, and my monthly pay pre tax etc would be £7000, then my taxable income is only £6000.

Hopefully so far I have managed to understand all that ok.

The next part gets us though. If we are understanding things correctly I'm going to get taxed at the following rates weekly

upto first £100 = 0% tax
next £42 = 10% tax
between £142 and up to £622.50 = 22% tax
Anything over = 40%

As a significant part of my wages will be above £622 it appears that I will get taxed at 40%.

Now the bit I don't understand. What happens if so far in total (including what I will earn from this contract), my income would not go near the level required in a year to hit the 40% tax bracket?

For example, lets just say so far in this tax year (all on PAYE taxation), my net pay has been 5k. With the contract money in the next 3 months I would still only be at around 26k which is way below the 40% tax bracket.

Do I claim it back? Or will it just sort itsself as they will know I haven't earned enough to hit the 40% bracket?

The other thing which is confusing us is it appears I will have to fill in a self assesment, even though I will be PAYE tax, is this right?

Can someone shed some light on all this for us, our brains are fried. And if possible, can someone give us a rough guestimate as to what my monthly take home pay for the next 3 months will be. Assuming a standard tax code and expenses (class e) of £1000, and £350 a day rates?

Many many thanks.

Dave