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Umbrella calculations and why they differ!

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    Umbrella calculations and why they differ!

    In recent months we have seen more and more enquiries from contractors looking to work via an umbrella company, and querying why we cannot offer them a higher take home – so I thought I would put this small guide together to help you understand what might be going on…

    So first of all let’s look at this in a very straightforward and simplistic manner; as an employee (which you should be if operating via a compliant brolly)… the first question I ask, is are you a 40% tax payer? If the answer to that is yes, then your take home cannot be more than 60% via a brolly. In realistic terms and due to the deductions, you are more likely to be looking at a figure of around 52-56% take home!

    So why are there differences?


    Well this could be down to a few things; most calculators will assume a standard tax code (probably 1100L for 2016) which will be applied to the calculation, obviously if your tax code does differ then this could have an impact on the final amount received.

    Then if you are looking at a monthly figure, make sure you are looking at a like-for-like calculation, some will work on 4 weeks, some will work on a calendar month, again, this will skew the figures.

    Some online calculators, ours included, will make the assumption that you are going to be working for the 12 months, earning that gross figure every month, but we all know that as a contractor this may not be the case, and as such any tax free allowance will be accrued for those periods when you are not in work, meaning your figure could increase after a break in assignments. Essentially this illustration is a worst-case scenario, based on the assumption that you will have ongoing earnings at the same rate for the full 12 months.

    I will also remind you that back in April 2016, umbrella companies had the ability to process expenses for tax relief purposes at source removed. This means that unless you can prove to HMRC that you are not under Supervision, Direction and/or Control or the right thereof, then you will be unable to claim this back via self-assessment at the end of the financial year. There are still numerous calculators online using assumptions of £X amount in expenses, they including this in your final take home figure – in reality, you may never see this, and it is potentially inflating your figure without any real justification.

    If we move away from the online calculation and look at a “mock payslip” scenario, this may differ from the online calculator based on the information you provide to them. A payslip, will normally show a snapshot at that point in time, and will assume that you will only earn that amount for that individual period; what it cannot do is take into consideration any previous earnings or Year to Date figures, unless you are able to provide these. So once again the reality of your paypacket may once again be affected by these figures and differ from a calculation provided. We will always provide a mock payslip with a Month 1 / Week 1 tax code (shown as 1100L W1/M1), this makes the assumption that you have paid all of your taxes to date correctly within that tax year, if the payslip shows a standard cumulative tax code, then it would accrue your tax free allowance up until that point, consider this unused and once again will give you a distorted figure.

    So going back to what I said at the start – the only difference, if you were doing an absolute like for like comparison, is the margin the umbrella company are charging – oh and the service you receive (which should mean them being able to explain all of this! )

    I hope this helps

    #2
    Originally posted by lucycontractorumbrella View Post
    In recent months we have seen more and more enquiries from contractors looking to work via an umbrella company, and querying why we cannot offer them a higher take home
    I go through a whole range of emotions when I read this. Surprise people are asking this, disappointment that they are, amazement they are so stupid, resignation that there will always be someone, annoyance people fall for this all ending in apathy because I don't really care.

    Great guide though. Very clear and concise. Worth something like this on the AUCAE site? I see an old article on loan schemes so worth adding this as it's pretty pertinent right now?
    Last edited by northernladuk; 31 January 2017, 15:11.
    'CUK forum personality of 2011 - Winner - Yes really!!!!

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      #3
      And now a stickie.
      "I can put any old tat in my sig, put quotes around it and attribute to someone of whom I've heard, to make it sound true."
      - Voltaire/Benjamin Franklin/Anne Frank...

      Comment


        #4
        Originally posted by northernladuk View Post
        I go through a whole range of emotions when I read this. Surprise people are asking this, disappointment that they are, amazement they are so stupid, resignation that there will always be someone, annoyance people fall for this all ending in apathy because I don't really care.

        Great guide though. Very clear and concise. Worth something like this on the AUCAE site? I see an old article on loan schemes so worth adding this as it's pretty pertinent right now?
        Ultimately people want to take home as much as they can of their gross - the shock comes when they see the net pay and realise they're not getting any benefits to go with it. To temper that, they should then calculate the same numbers but using the equivalent permie wage of 45 grand a year rather than their day rate multiplied up.
        The greatest trick the devil ever pulled was convincing the world that he didn't exist

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          #5
          Originally posted by cojak View Post
          And now a stickie.
          appreciate anything that may help stop me having to repeat the same thing over and over!

          Comment


            #6
            Originally posted by northernladuk View Post
            Great guide though. Very clear and concise. Worth something like this on the AUCAE site? I see an old article on loan schemes so worth adding this as it's pretty pertinent right now?
            Thanks - will rewrite slightly to prevent duplicates

            Comment


              #7
              Originally posted by lucycontractorumbrella View Post
              Thanks - will rewrite slightly to prevent duplicates
              Are you in a position to write about schemes or is that more a limited company thing?
              The greatest trick the devil ever pulled was convincing the world that he didn't exist

              Comment


                #8
                Originally posted by LondonManc View Post
                Are you in a position to write about schemes or is that more a limited company thing?
                I have plenty of information on schemes but the exact way they work is pretty much anyone's guess - as they all seem to do something slightly different which apparently makes them compliant!

                Scheme's still sit with Brollies, as most of them masquerade as "umbrella's" - the latest one I found, call themselves an alternative umbrella but pay out dividends to workplace directors every quarter... would love to see what happens if the workplace group doesn't make a profit!

                Comment


                  #9
                  Originally posted by lucycontractorumbrella View Post
                  I have plenty of information on schemes but the exact way they work is pretty much anyone's guess - as they all seem to do something slightly different which apparently makes them compliant!

                  Scheme's still sit with Brollies, as most of them masquerade as "umbrella's" - the latest one I found, call themselves an alternative umbrella but pay out dividends to workplace directors every quarter... would love to see what happens if the workplace group doesn't make a profit!
                  Single class of shares for all workplace directors or alphabet share classes?
                  merely at clientco for the entertainment

                  Comment


                    #10
                    Originally posted by lucycontractorumbrella View Post
                    I have plenty of information on schemes but the exact way they work is pretty much anyone's guess - as they all seem to do something slightly different which apparently makes them compliant!

                    Scheme's still sit with Brollies, as most of them masquerade as "umbrella's" - the latest one I found, call themselves an alternative umbrella but pay out dividends to workplace directors every quarter... would love to see what happens if the workplace group doesn't make a profit!
                    Thanks Lucy - I was thinking of something on the "what to watch out for" to prevent new contractors being tempted down the dark path.
                    The greatest trick the devil ever pulled was convincing the world that he didn't exist

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