Help understanding Employers NI and salary breakdown.

[Madmax86]

Hi all

I am trying to understand exactly how my IR35 payslip is broken down and have reached a bit of a stumbling block when it comes to Employers NI.

So to help clarify my question, I will use some example figures to illustrate the point...

• Total income to Umbrella company: £10,400
• Umbrella costs:
  • Margin: 40.00
  • Employers NI: £1,120.23
  • Apprenticeship Levy: £44.38
  • Employer Salary sacrifice saving: £26.24
  • Employer's pension contribution: £293.52

After deducting all the Umbrella costs above (a total of £1,524.37), I am left with a total taxable pay of £8,875.63.

This all makes sense.

Now the amount of Employers NI above is is £1,120.23.

From my understanding, I believe the formula for this is the following….

Salary = £8,875.63
NI Allowance = £9,100
Employers NI rate = 13.8%

So based on this… the formula would be (£8,875.63-(£9,100/12))*13.8% = £1,120.19 (it’s 4p out, but almost accurate)


So my questions are…

1. Firstly, is the formula I have used above correct for working out Employers NI? If not, please feel free to correct me.
2. If the Employers NI is worked out from the salary, yet the salary is determined until after all umbrella costs have been deducted (including Employers NI), how is the salary determined? It seems like a chicken and egg situation. You would need to have worked out the salary to determine the Employers NI however you would need to have worked out the Employers NI in order to deduct it from the umbrella costs, leaving the remaining salary.

Hopefully that makes sense.

There is obviously something wrong with my assumptions above so would be very grateful for someone to clarify what that is.

[malvolio]

Looks ok to me but I'll bow to the people who really understand the various elements in case there's something obvious.

However, the 4p (if that's the only concern) is almost certainly an accumulated rounding error which may well round the other way later in the year but as it stands represents a shade over 0.0003% of your gross....

[WTFH]

It seems like a chicken and egg situation.

It's just a rather drawn out equation. The umbrella will put the 10,400 into one field, and it will spit out all the others. You're not dealing with two independent variables. They are related.
If y = 0.138(x-758.33)
Then x + y is the same as x + (0.138(x-758.33))

So, all you do is build up a big formula for each part of the breakdown and it works it all out. Part of the "trick" of it is not to say what is "umbrella costs" etc, but just look at each value and define it.

It ends up something like:
If x = salary
0.005x = apprenticeship levy
0.003x = salary sacrifice (approx)
0.033x = pension (approx)
0.138(x-758.33) = Employer NI

That means:
10400 = x + 0.005x + 0.003x + 0.033x + 0.138(x-758.33) + 40

Solving that equation gives you your salary and all deductions.

(roughly)

10400 = 1.179x - 64.65
1.179x = 10464.65
x = 8875.87

That's approx because it depends exactly what the salary sacrifice is and the pension, but I've taken the numbers you've written down and approximated them as a percentage.

[northernladuk]

Wasn't there a company set up that would audit your payslip for you in light of all the problems with Umbrellas?

Ah.. it was https://saferec.co.uk/

Trying to sort numbers on here rarely works.

[WTFH]

It ends up something like:
If x = salary
0.005x = apprenticeship levy
0.003x = salary sacrifice (approx)
0.033x = pension (approx)
0.138(x-758.33) = Employer NI

That means:
10400 = x + 0.005x + 0.003x + 0.033x + 0.138(x-758.33) + 40

Solving that equation gives you your salary and all deductions.

(roughly)

10400 = 1.179x - 64.65
1.179x = 10464.65
x = 8875.87

That's approx because it depends exactly what the salary sacrifice is and the pension, but I've taken the numbers you've written down and approximated them as a percentage.

I needed to go to 4 decimal places is percentage!

If x = salary
0.00500x = apprenticeship levy
0.00296x = salary sacrifice (approx)
0.03307x = pension (approx)
0.138(x-758.33) = Employer NI

That means:
10400 = x + 0.005x + 0.00296x + 0.03307x + 0.138(x-758.33) + 40

10400 = 1.17903x - 64.65
1.17903x = 10464.65
x = 8875.64

[Madmax86]

10400 = 1.179x - 64.65
1.179x = 10464.65
x = 8875.87

Thanks a lot for this WTFH this is very helpful indeed.

I was with you for the bulk of it but do do you mind elaborating on how you got to the '1.179x' and '64.65' numbers above?

[WTFH]

Thanks a lot for this WTFH this is very helpful indeed.

I was with you for the bulk of it but do do you mind elaborating on how you got to the '1.179x' and '64.65' numbers above?

Just add up the numbers. It’s really basic maths.
x + 0.005x + 0.00296x + 0.03307x + 0.138x = what?
(0.138 * -758.33) + 40 = what?

Now, these figures only work based on the information you have supplied, i.e. I’ve back calculated the percentages for each figure. If you increase your pension or salary sacrifice, etc, then the calculation would have to be changed appropriately.
Bottom line is, no the umbrella isn’t screwing you over, no, it’s not a chicken and egg conundrum, and maybe just accept that they know what they are doing.

[Madmax86]

Just add up the numbers. It’s really basic maths.
x + 0.005x + 0.00296x + 0.003307x + 0.138x = what?

Adding up those numbers gives me 0.149267. It doesn't explain how you get to 1.179. You have also used 'x' at the start but we do not yet know the value of 'x'. Hence my confusion.

(0.138 * -758.33) + 40 = what?

Ok I now see how you got to 64.65 as you have now changed the formula to use the Asterix instead of the 'x' which you used previously. You have been using 'x' to denote the salary, so you can hopefully see why I was confused.

Bottom line is, no the umbrella isn’t screwing you over, no, it’s not a chicken and egg conundrum, and maybe just accept that they know what they are doing.

Nowhere on this thread have I alluded to the umbrella screwing me over or not trusting them. The reasons for wanting to know this information is so I can create my own calculations so that I can adjust certain information (e.g pension contributions) without having to ask them every time for an illustration.

[WTFH]

Adding up those numbers gives me 0.149267. It doesn't explain how you get to 1.179. You have also used 'x' at the start but we do not yet know the value of 'x'. Hence my confusion.

Sorry, my mistake in typing too many zeros late last night in one of the values (I'd put the right number of zeros in earlier), also think of the first x as "1x":
x + 0.005x + 0.00296x + 0.03307x + 0.138x ... add all the numbers up and you get 1.179x

x is your take home salary, it is based on the rate the umbrella gets as per the formula. If your rate goes up, x goes up. You asked how they calculated your salary, they calculated your salary by putting your rate into a spread sheet, along with how much salary sacrifice you want (as a percentage) and how much pension (as a percentage), and it turns round and says x = £8875.64

As for switching from x to *, no I didn't, I just "expanded the argument" (mathematical term).
0.138(x-758.33) is the same as writing (0.138*x + 0.138*-785.33) or (0.138x -64.65)

[Madmax86]

Sorry, my mistake in typing too many zeros late last night in one of the values (I'd put the right number of zeros in earlier), also think of the first x as "1x":
x + 0.005x + 0.00296x + 0.03307x + 0.138x ... add all the numbers up and you get 1.179x

This is amazing thank you for clarifying. That did the job, this will be really useful going forwards.


I just have one question regarding the way you write your formulas. I'm not too familiar with mathematical equations which is why I struggled understanding your mathematical arguments.

10400 = 1.17903x - 64.65
1.17903x = 10464.65
x = 8875.64

I got to my answer below by doing this (in simple layman's terms)...

Having already established the following figures...

a = 1.17903
b = -64.65


I then did (£10,400 - b)/a = £8,875.64.

Is that a dumbed down way of writing your method above?

I already have my answer, the above is just for my comprehension and as you know, every day's a school day!