Umbrella Pay issues

[LisaContractorUmbrella]

I am currently working as a contractor (first assignment so be gentle with my ignorance!) and I'm pretty sure that I am being underpaid. When I signed up with the umbrealla company I was promised an estimated (oxymoron there...) 79% or my gross pay. I am on an hourly rate of £13.33/hour and worked 39.75 hours last week (bare with me through this example please). This works out at £529.87 gross pay. So if I were to get the alleged 79% of this it would be £418.60.

My payslip has come through at £365.94 which is 69% or my gross and most other weeks it is closer to 66%.

For about 2 months my umbrella company have been telling me that this difference is due to the fact that I am on an emergency tax code (603L Week 1). This is true as my previous employer took about 8 weeks to send my P45 through. I have finally got this through to my umbrella company and they have no informed me that my emergency tax code is correct and that I will be taxed on a week by week basis. I don't really understand this but it is fine as I do not believe the issue comes from over paying in my income tax.

I got back to them and asked them for a breakdown of how my pay was calculated and they got back to me with this:

Please see the deductions from your pay as follows;
Invoice amount £529.87
-£40.57 Employers NI (12.8%)
-£27.50 PPA Cost (weekly service fee)
-£39.86 Business Expenses
You are then taxed & NI’d on the remaining £421.94
Amount £421.94
-£34.86 Employees NI (11%)
-£61.00 PAYE (tax @ 20% after £116.06 free pay allowance applied)
+£39.86 Business Expenses
= £365.94 Total payable.

For a start these number simply do not add up. The Employers NI should be 12.8% of my income. This is £64.30 not £40.57. Same again with the Employees NI.

Most distressing to me is the fact that I am paying both Employees and Employers NI. Is this just to do with the way that umbrella companies set you up as "a director of your own company"?


Normally I would put this down as just one of those things that hasn't worked out as well as I'd hoped but I have a colleague who is with the same umbrella company who is earning £3.33 less per hour (about £130/week) than me but is getting paid pretty much the same weekly NET amount.

Any advice that anyone can give me will be much appreciated.

Your net earnings are correct. Your umbrella company should never have promised you a return of 79%; in order to achieve this sort of figure you would need to be claiming expenses of about £200 per week, which is obviously no where near reality.

The fact that you are on a week 1 tax code makes no real difference to your tax home pay. You will still have the same tax free allowance each week as you would if you were on a standard 603L tax code - the only difference is that the allowance is not cummulative. This means that, if you are not paid for a couple of weeks for whatever reason, your tax free allowance will be £6035 divided by 52 rather than £6035 divided by 52 multiplied by 3 (1 allowance for that week plus 2 for the weeks that you did not get paid).

HTH

[Beefy198]

Setting up a Ltd company won't help much unless you can get out of IR35

Not just that - at £13.33 an hour would it be worth it?

[radish2008]

I know - hurts doesn't it. But that's how it works I am afraid.

Setting up a Ltd company won't help much unless you can get out of IR35 - and I think you need a bit more experience with how contracting / IR35 work before you can safely do that. I would advise first time contractors to get through an umbrella for the first contract and take the tax hit.

Your surpise is not unique. A lot of people don't understand the costs of being a contractor until their first "payslip" arrives, especially if/when IR35 applies.

I bet no-one made it clear to you (agent, umbrella etc.) that out of your hourly rate you would be hit for so much tax.

However, the blame cuts both ways. At ClientCo, I permie heard how much contractors were getting paid per hour and promptly loaded up Calculator and did X * 40 * 52 and his eyes widened at how much he thought we got.

I didn't bother trying to educate him.

this is a really good post and mirrors my experience - I was not happy getting my first pay through an umbrella and luckily it was only a month contract - the next 2 or 3 extensions went through my limited - it's more work but staisfying and if you want to run your own business the only way to go. umbrellas always promise you more to get you on the hook but at the end of the day you are just an employee

[ASB]

However, the blame cuts both ways. At ClientCo, I permie heard how much contractors were getting paid per hour and promptly loaded up Calculator and did X * 40 * 52 and his eyes widened at how much he thought we got.

Quite. Look at it from the point of view of the consumer. Say you are on a direct contract at 350 per day. Then your actual cost is in the order of 78k (allow bank holidays, holidays and 5 days sick).

Now, if you are salaried at 50k - and on a normal benefits package to include medical, life, pension, 10% bonus, car. Then your actual cost is likely to be in the order of 75k. Factor in the HR cost as well and it's going up a bit.

Fact is that simply the cost of employment are rolled up in the rate plus a small risk premium.

[centurian]

Most distressing to me is the fact that I am paying both Employees and Employers NI.

I know - hurts doesn't it. But that's how it works I am afraid.

Setting up a Ltd company won't help much unless you can get out of IR35 - and I think you need a bit more experience with how contracting / IR35 work before you can safely do that. I would advise first time contractors to get through an umbrella for the first contract and take the tax hit.

Your surpise is not unique. A lot of people don't understand the costs of being a contractor until their first "payslip" arrives, especially if/when IR35 applies.

I bet no-one made it clear to you (agent, umbrella etc.) that out of your hourly rate you would be hit for so much tax.

However, the blame cuts both ways. At ClientCo, I permie heard how much contractors were getting paid per hour and promptly loaded up Calculator and did X * 40 * 52 and his eyes widened at how much he thought we got.

I didn't bother trying to educate him.

[Svalbaard]

Promised an estimated 79%? Not a chance.

If you're claiming legitimate expenses I would say that 66% through an umbrella is quite good. So cheer up.

Couldn't agree more. There is no way on Earth you will get 79% from an umbrella company. Mine is currently about 62%.

Perhaps you can name them for us?

[Beefy198]

Promised an estimated 79%? Not a chance.

If you're claiming legitimate expenses I would say that 66% through an umbrella is quite good. So cheer up.

[Gonzo]

Please see the deductions from your pay as follows;
Invoice amount £529.87
-£40.57 Employers NI (12.8%)
-£27.50 PPA Cost (weekly service fee)
-£39.86 Business Expenses
You are then taxed & NI’d on the remaining £421.94
Amount £421.94
-£34.86 Employees NI (11%)
-£61.00 PAYE (tax @ 20% after £116.06 free pay allowance applied)
+£39.86 Business Expenses
= £365.94 Total payable.

For a start these number simply do not add up. The Employers NI should be 12.8% of my income. This is £64.30 not £40.57. Same again with the Employees NI.

The trouble is that the actual calculation is more complicated than that.

You have to view what you call "your pay" as your total business income.

Out of that you have to pay the Umbrella charges. This leaves you with the total amount that can be distributed including the Employers NI, Your Salary and the Employee's NI and Tax.

So the amount paid in employers NI will not be 12.8% of what you see as "your pay", but (12.8/112.8 * 100) * (your pay - umbrella charges). It is more complicated than that because of expenses but that is too complicated for me to work out on a Saturday morning.

If you make sure that they are using the correct tax code you will be most of the way there.

Most distressing to me is the fact that I am paying both Employees and Employers NI. Is this just to do with the way that umbrella companies set you up as "a director of your own company"?

With a standard Umbrella company* you are not the director of your own company, you are an employee of the umbrella. You pay all the employment taxes (whereelse is the money going to come from), including the employers'.

Oh, and you don't get any employment "rights" either. Good, isn't it?





*For the purposes of this post I will assume that you are not somehow using a Managed Service Company.

[VectraMan]

The good news is that if you are overpaying due to being stuck on emergency tax, you will get the money back. I got stuck on emergency tax for my first contract which was through an umbrella. Annoying at the time, but I received a full refund the following July.

It's amazing how many people don't understand about employer's NI (and the umbrella companies don't exactly help). BTW there's a £105pw threshold before you start paying employer's NI - though I still can't make that arrive at the figures quoted here.

[pmeswani]

As already stated, read the first timers guide.

However, to make it slightly easy for you, when you go through an Umbrella, you are not a Director of any company.... full stop... period.... end of story. You are an employee of the Umbrella company for the purposes of tax.... full stop... period.... end of story. The Umbrella needs to pay your employers and employees tax somehow. They are not a cash cow for you to perform daylight robbery. They rely on your income to pay themselves for providing you a service. The Employers tax has to come from somewhere, and that is taken from your rate.

I found this out the hard way, and accepted it straight away. If you are not happy with this, terminate the contract with the agency, set up a limited company and sign a new contract between your limited company and the agency. That way, you save money on tax. However, without knowing how long your contract is for, the chances are you are better off with the umbrella.

[t2pkid]

I am currently working as a contractor (first assignment so be gentle with my ignorance!) and I'm pretty sure that I am being underpaid. When I signed up with the umbrealla company I was promised an estimated (oxymoron there...) 79% or my gross pay. I am on an hourly rate of £13.33/hour and worked 39.75 hours last week (bare with me through this example please). This works out at £529.87 gross pay. So if I were to get the alleged 79% of this it would be £418.60.

My payslip has come through at £365.94 which is 69% or my gross and most other weeks it is closer to 66%.

For about 2 months my umbrella company have been telling me that this difference is due to the fact that I am on an emergency tax code (603L Week 1). This is true as my previous employer took about 8 weeks to send my P45 through. I have finally got this through to my umbrella company and they have no informed me that my emergency tax code is correct and that I will be taxed on a week by week basis. I don't really understand this but it is fine as I do not believe the issue comes from over paying in my income tax.

I got back to them and asked them for a breakdown of how my pay was calculated and they got back to me with this:

Please see the deductions from your pay as follows;
Invoice amount £529.87
-£40.57 Employers NI (12.8%)
-£27.50 PPA Cost (weekly service fee)
-£39.86 Business Expenses
You are then taxed & NI’d on the remaining £421.94
Amount £421.94
-£34.86 Employees NI (11%)
-£61.00 PAYE (tax @ 20% after £116.06 free pay allowance applied)
+£39.86 Business Expenses
= £365.94 Total payable.

For a start these number simply do not add up. The Employers NI should be 12.8% of my income. This is £64.30 not £40.57. Same again with the Employees NI.

Most distressing to me is the fact that I am paying both Employees and Employers NI. Is this just to do with the way that umbrella companies set you up as "a director of your own company"?


Normally I would put this down as just one of those things that hasn't worked out as well as I'd hoped but I have a colleague who is with the same umbrella company who is earning £3.33 less per hour (about £130/week) than me but is getting paid pretty much the same weekly NET amount.

Any advice that anyone can give me will be much appreciated.

Correct me if i am wrong but i get the calculations to be:

Gross 529.87
Er NI -48.21 (((529.87-105)/1.128)*.128)
Weekly Fee -27.50
Business Expenses -39.86
Total taxable Pay 414.30
Ee NI -34.02 ((529.87-105)*.11)
PAYE -59.65 ((529.87-116)*.2)
Business Expenses 39.86
Net Pay 360.49


This coming out at around 68% of your gross invoice. I believe that you actually become an employee of the umbrella company but they effectively deduct the amount of employers NI that they have to pay on your salary from you as an additional charge. You personally do not have a company.

Some one else care to cast an eye on the figures?

[blacjac]

Read the first timers guides.

[bobofgold]

I am currently working as a contractor (first assignment so be gentle with my ignorance!) and I'm pretty sure that I am being underpaid. When I signed up with the umbrealla company I was promised an estimated (oxymoron there...) 79% or my gross pay. I am on an hourly rate of £13.33/hour and worked 39.75 hours last week (bare with me through this example please). This works out at £529.87 gross pay. So if I were to get the alleged 79% of this it would be £418.60.

My payslip has come through at £365.94 which is 69% or my gross and most other weeks it is closer to 66%.

For about 2 months my umbrella company have been telling me that this difference is due to the fact that I am on an emergency tax code (603L Week 1). This is true as my previous employer took about 8 weeks to send my P45 through. I have finally got this through to my umbrella company and they have no informed me that my emergency tax code is correct and that I will be taxed on a week by week basis. I don't really understand this but it is fine as I do not believe the issue comes from over paying in my income tax.

I got back to them and asked them for a breakdown of how my pay was calculated and they got back to me with this:

Please see the deductions from your pay as follows;
Invoice amount £529.87
-£40.57 Employers NI (12.8%)
-£27.50 PPA Cost (weekly service fee)
-£39.86 Business Expenses
You are then taxed & NI’d on the remaining £421.94
Amount £421.94
-£34.86 Employees NI (11%)
-£61.00 PAYE (tax @ 20% after £116.06 free pay allowance applied)
+£39.86 Business Expenses
= £365.94 Total payable.

For a start these number simply do not add up. The Employers NI should be 12.8% of my income. This is £64.30 not £40.57. Same again with the Employees NI.

Most distressing to me is the fact that I am paying both Employees and Employers NI. Is this just to do with the way that umbrella companies set you up as "a director of your own company"?


Normally I would put this down as just one of those things that hasn't worked out as well as I'd hoped but I have a colleague who is with the same umbrella company who is earning £3.33 less per hour (about £130/week) than me but is getting paid pretty much the same weekly NET amount.

Any advice that anyone can give me will be much appreciated.