Reply to: little help...

[malvolio]

Details, mere details. Why spoil the argument with facts...

You're right, his effective annual salary is around the £70k mark so if he's in a non-divi paying umbrella, high rate is applicable. Also, if that is the case, he's still paying more tax than necessary, of course...

[rooney]

The Original Post

The original post showed what I think is a non dividend scheme so the deduction of tax at the appropriate bands going upto the highest rate is quite correct.

[malvolio]

Sorry, I thought I knew how PAYE worked, but that was a few years back when I was writing payroll systems. Ho hum...

On my salary I don't get into the 40% band so even if SJD are assuming a whole year's income in calculating my monthly tax dedcutions to level the nett pay out, it's still at basic rate. My high rate tax comes after the year end the divis go on the SA form and I get a separate bill (which I pay with the money stashed in what is laughingly called a "high interest" account!). The umbrella quoted in the OP is not doing that, they're assuming high rate from the beginning. Ergo they are extracting a percentage of the their clients' money unnecessarily.

It is entirely logical to assume that they do so to cover their own potential liability and to even out the contractor's pay monthly - after all, you don't use a brolly if you're interested in how it all works - but I still think that in terms of who you allow to do what with your money, it's a bad approach.

[planetit]

OK, so you're happy to hand over a lump of your money to someone else to invest on the understanding you get it back, with a small amount of interest which ill be rather less than they have earned, at some future point?

And this is a good idea?

In short - Yes

In long:-
1) You won't get interest returned. That's not how PAYE works. Suggest you read up on it.
2) the interest you will earn on the money not paid 'til year end adds up to feck all.
3) The money saved by not having a PAYE investigation adds up to a hell of a lot.

Anyhow Malvolio, I thought you were with SJD? Did they advise you to use up your basic rate allowance first before moving on the the 40% band?

[MarillionFan]

Bunch of Permies

Hang on chaps you're all talking like perms.

Surely it doesnt matter if your a little behind at the start of the year, damn it we can afford it. If you cant your not contracting properly.

MF in 'Some People' Mode.

[malvolio]

OK, so you're happy to hand over a lump of your money to someone else to invest on the understanding you get it back, with a small amount of interest which ill be rather less than they have earned, at some future point?

And this is a good idea?

[planetit]

That only works if you're a permy. It's completely daft to allow that situation if you're contracting. What if you don't work that long?

Exactly the same as happens with a permie. At the end of the year you get a rebate. Remember, from a PAYE point of view you ARE a permie.

Actually my accountant once told me there is no statutory requirement to pay PAYE each month. So long as it’s paid by the end of the year. So they can’t force you to pay each month, but you will have to file nil returns each month/quarter (which to my mind is a kind of lie, since you HAVE paid a salary and SHOULD pay PAYE), and they will make life difficult for you (you will be pushed up the PAYE audit league table).

[Denny]

So are you saying that in the first month you apply the full tax free allowance to your salary, then use up all the 10% band, then the standard rate? This is definitely not they way it’s supposed to work. Not sure if it’s exactly illegal, but it’s not the proper way of running a PAYE system. Your allowances are spread over the year, so your tax and take home should be the same each month (assuming your salary and tax code stay the same).

That only works if you're a permy. It's completely daft to allow that situation if you're contracting. What if you don't work that long?

[malvolio]

What?

[rooney]

PAYE payments

All company's have to pay any tax/ni they deduct by the 19th of the following month. The vat will be paid quarterly but of course once they go over a certain size they have to settle on account monthly (i.e. they work out how much they paid last quarter and then they pay just short of a third of that each month).

[malvolio]

You might know your planned income (as I know mine), but does the umbrella? You may be out of work, you may switch to a different company, you may even bin umbrellas completely and go the LtdCo route. Taking clients' money in anticipation does not seem totally ethical or justifiable to me, and you can bet it's not getting paid to Hector until it absolutely has to be, at the umbrella's company year end.

[planetit]

Malvolio is correct. For those without crystal balls

Why would I need a crystal ball? As an employee I know what my salary this year will be - I set it.

Unless we are talking about FAIL IR35 (or VERY low company income) in which case you don't know your salary until the end of the year.

[xoggoth]

Malvolio is correct. For those without crystal balls and working according to IR calculation methods anyhow.

[IR35 Avoider]

Something I got caught with, I once used an umbrella for a couple of months before returning to my limited. As a director of your limited, your tax and NI is done one an annual basis, but as a mere employee of an umbrella if you earn (say) 6K a month for two months then don't work the rest of the year, you pay NI for the first two months as if you are going to earn 6K a month for the whole year, and you can't get it back even though your eventual annual salary is nothing like that. I lost several hundred pounds in extra NI by not moving back to my ltd two months earlier at the start of the tax year.

Tax is not a problem because it all sorts itself out in the end once your tax code is correct and your tax return done.

[jonnyh]

Emergency Tax

I got caught with this once the main issue with the payment is that you are being taxed on a week1 or emergency tax code. What this means is that each time you are paid only 1 weeks tax allowance will be applied to your salary. This does mean for example if this was a monthly payment you will be paying a much larger amount of tax as rather than getting 1/12 of your tax allowance you are actually only getting 1/52 of your tax allowance in each payment.

Once the Umbrella got my up to date tax details from the IR then my tax code was updated and I did get a rebate for over paid tax