Reply to: Newbie to contracting- first pay, and seemed to have had alot taken

[LisaContractorUmbrella]

This is because an employee working for a client and claiming expenses from the client gets the full amount reimbursed.

By contrast, a contractor working for an umbrella gets given a big list of "expenses" that they can claim, but what catches the noobie contractors out is that these are deducted from their own contract income and paid to them gross rather than being reimbursed by the umbrella as they might intuitively expect.

NNNNNOOOOOOOOOOOOOOOoooooooooooooooooooooooooooooo ooooooooooooooooo Umbrella companies (well this one at least) do not give contractors big lists of expenses that they can claim. We send each newbie a guide which explains exactly how it will all work and make it clear that everything needs to be supported by receipts and that they will get the tax benefit and not a total reimbursement

[Wanderer]

It amazes me how many people struggle to understand the above. Spending extra for the sake of getting tax relief is ridiculous, but done by many in the naive belief it makes them better off.

This is because an employee working for a client and claiming expenses from the client gets the full amount reimbursed.

By contrast, a contractor working for an umbrella gets given a big list of "expenses" that they can claim, but what catches the noobie contractors out is that these are deducted from their own contract income and paid to them gross rather than being reimbursed by the umbrella as they might intuitively expect.

[Maslins]

don't forget - you may get tax relief on the Pret sandwich but you still have to buy it in the first place. Making a lunch at home will probably cost less than a pound - buying it in Pret or Marks or similar will cost £5-£8 on which you will then get tax relief but you still out of pocket by £3-£5 more than if you had brought in lunch from home.

It amazes me how many people struggle to understand the above. Spending extra for the sake of getting tax relief is ridiculous, but done by many in the naive belief it makes them better off.

...but back on topic - yes HMRC sting working people in a variety of ways. The headline basic rate of 20% income tax doesn't sound too bad...until you consider NICs realistically make basic rate for employees >40%...and that's before you hit higher rate, or lose your personal allowance, or hit additional rate.

[northernladuk]

For instance, I pay zero NI - either employer or employee just tax, splitting income with partner so no 40% tax, so probably bringing in just over 80% of gross.....

And also that isn't a like for like example. You are using some questionable routes i.e. the splitting, and paying under NI and you are using two people, umbrella will be one and so the comparison is invalid.

[psychocandy]

But that only applies outside IR35 - inside IR35 and you'll pay income tax, employees and employers NICs and accountancy fees

True enough. I guess inside IR35 is much the same then.

[LisaContractorUmbrella]

Oh dear. Looks like OP has been told a few porkies by the umbrella....

Never done umbrella but surely you're losing tons by having to pay NI (employers and employee) and tax PLUS umbrella cut (as opposed to ltd)?

It seems a lot of people on the lower rates seem to go for this but it seems that a low daily rate becomes an even lower in pocket rate if you go umbrella? Even if you're inside IR35 you're worse off.

I know there are reasons why some prefer umbrella but surely ltd is the way to go long term at least?

For instance, I pay zero NI - either employer or employee just tax, splitting income with partner so no 40% tax, so probably bringing in just over 80% of gross.....

But that only applies outside IR35 - inside IR35 and you'll pay income tax, employees and employers NICs and accountancy fees

[Wanderer]

Calculator's actually a bit misleading Wanderer - they have included annual fees from an umbrella as £1800 (£150 per month) and £1368 from an accountant (£114.00) per month. We charge £95.00 which is considerably less than the figure being used in the take home pay calculation

Fair point! 150/month is too high for a brolly.

[psychocandy]

Oh dear. Looks like OP has been told a few porkies by the umbrella....

Never done umbrella but surely you're losing tons by having to pay NI (employers and employee) and tax PLUS umbrella cut (as opposed to ltd)?

It seems a lot of people on the lower rates seem to go for this but it seems that a low daily rate becomes an even lower in pocket rate if you go umbrella? Even if you're inside IR35 you're worse off.

I know there are reasons why some prefer umbrella but surely ltd is the way to go long term at least?

For instance, I pay zero NI - either employer or employee just tax, splitting income with partner so no 40% tax, so probably bringing in just over 80% of gross.....

[LisaContractorUmbrella]

Umbrellas are notorious for overestimating the amount you will take home from your gross contract value and a lot of people are disappointed when they find the actual take some amount as compared to the amount that the sales person quotes them.

There is a calculator here that should give you a more reliable picture though it depends on a number of things including now much money you have earned already this year which may push you into the higher rate tax and reduce the take home amount.

Take it up with them but what you have probably found out is that you pay a lot of tax when you work through an umbrella. If you are going to be contracting long term and you are outside IR35 then you should consider forming a limited company.

Calculator's actually a bit misleading Wanderer - they have included annual fees from an umbrella as £1800 (£150 per month) and £1368 from an accountant (£114.00) per month. We charge £95.00 which is considerably less than the figure being used in the take home pay calculation

[LisaContractorUmbrella]

Sorry Lisa. Yes, I meant legitimate expenses only. I did think of going back to edit, but was lazy.
But, for example, it's correct that they would prefer that you buy lunch everyday and expense the subsistence, rather than making a packed lunch, as you then retain more of the invoiced amount, and the umbrella is able to legitimately state that "on average our clients retain x amount".

No, no, no Umbrella companies cannot legitimately state an average take home pay which is any higher than any other umbrella company's (other than variances in the margin taken) based on the same circumstances. The quotes you are referring to are a marketing ploy which will cause nothing but disappointment when you receive your first payslip. We all pay through PAYE, we can only process expenses allowable by HMR&C and, as employers, we certainly have no place in trying to sway people's luncheon preferences - don't forget - you may get tax relief on the Pret sandwich but you still have to buy it in the first place. Making a lunch at home will probably cost less than a pound - buying it in Pret or Marks or similar will cost £5-£8 on which you will then get tax relief but you still out of pocket by £3-£5 more than if you had brought in lunch from home.

[Ticktock]

Umbrella companies do not like you to expense loads unless you have incurred loads of costs that can be legitimately claimed as expenses i.e. are allowable by HMR&C; encouraging contractors to claim loads of expenses that they are not entitled to claim is likely to result in the umbrella company going down the tubes following a stern talking to by HMR&C

Sorry Lisa. Yes, I meant legitimate expenses only. I did think of going back to edit, but was lazy.
But, for example, it's correct that they would prefer that you buy lunch everyday and expense the subsistence, rather than making a packed lunch, as you then retain more of the invoiced amount, and the umbrella is able to legitimately state that "on average our clients retain x amount".

[Wanderer]

I was originally told that with milleage allowance etc I should be gettins approx £148 a day after contributions etc. This is working out approx £122 a day.

Umbrellas are notorious for overestimating the amount you will take home from your gross contract value and a lot of people are disappointed when they find the actual take some amount as compared to the amount that the sales person quotes them.

There is a calculator here that should give you a more reliable picture though it depends on a number of things including now much money you have earned already this year which may push you into the higher rate tax and reduce the take home amount.

Take it up with them but what you have probably found out is that you pay a lot of tax when you work through an umbrella. If you are going to be contracting long term and you are outside IR35 then you should consider forming a limited company.

[LisaContractorUmbrella]

Im new to contracting, and have been paid for 12 days work (started mid month)

I'm using a well know umbrella company, Im on a day rate of £200 a day. so £2400 for the 12 days ive worked is what was invoiced yet when Ive received my pay ive got £1488.

The payslip isnt complete available yet, but can anyone shed some light on why im paying £922?

I was originally told that with milleage allowance etc I should be gettins approx £148 a day after contributions etc. This is working out approx £122 a day.

Any advice /help appreciated.

The rate of £200 per day is the contract rate between the umbrella company and the agency; you work under a contract of employment with the umbrella company. Your umbrella company is obliged, by law to make payment for employer's national insurance (currently 13.8%) to HMR&C so this is deducted from the £200, as is the umbrella company's margin; your salary is the remainder and is subject to income tax and employee's national insurance contributions as with any other employment

HTH

[LisaContractorUmbrella]

So your take home is about 68%

Out of your invoice you will have had several deductions.
Employees National Insurance
Employers National Insurance (you pay this also)
Income Tax
Their fee.

Don't forget, the more expenses you put through (travel, subsistence) the higher percentage you'll keep, as these reduce how much of your top line is subject to deductions. Umbrella companies like you to expense loads, as then they can claim a higher average retainable for their customers.

Umbrella companies do not like you to expense loads unless you have incurred loads of costs that can be legitimately claimed as expenses i.e. are allowable by HMR&C; encouraging contractors to claim loads of expenses that they are not entitled to claim is likely to result in the umbrella company going down the tubes following a stern talking to by HMR&C

[Ticktock]

So your take home is about 68%

Out of your invoice you will have had several deductions.
Employees National Insurance
Employers National Insurance (you pay this also)
Income Tax
Their fee.

Don't forget, the more expenses you put through (travel, subsistence) the higher percentage you'll keep, as these reduce how much of your top line is subject to deductions. Umbrella companies like you to expense loads, as then they can claim a higher average retainable for their customers.