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85% take-home from your Umbrella? Don’t be fooled

If anyone tells you to expect 80% or more of your income as take-home pay, treat it as the surest sign your Umbrella isn’t following the rules but is leaving you exposed. Chris James, Head of Accounting at JSA and Chair of the Freelancer and Contractor Services Association (FCSA), explains.

Often promoted as loan schemes or investment opportunities, there are a myriad of ways in which these non-compliant Umbrellas seek to bend the rules. Contractors are hoodwinked into believing these schemes are legitimate. But as convincing as they may sound, what these companies do boils down to nothing more than aggressive tax avoidance.

If the Umbrella company promises you 85% take-home pay, you know that something may be wrong. The best way to protect yourself is to know what your take-home pay should be.

Here we provide a detailed explanation of how your take-home pay can be worked out, but we also offer free, no obligation take-home pay calculations based on your specific circumstances.  Get in touch with one of our expert contractor accountants today to request your free pay illustration.

How do you work out your take-home pay?

As an Umbrella employee there are Umbrella-specific deductions that affect your pay:

  • Assignment fee

This is the rate you see in the advert for a role. It’s the fee paid by employment agency to the Umbrella company for your work.

  • Agency margin

The Agency will take a profit margin from the rate it receives from the end user (the organisation you’re providing services to), and pass the rest on to your Umbrella provider.

  • Umbrella margin

The Umbrella will take a margin from the assignment rate it receives from your Agency.

  • Gross rate of pay

Your gross rate of pay is the assignment fee minus the Umbrella margin and employment tax and other legally-required deductions.

Standard deductions

There are also deductions which apply to all employees including Umbrella employees under UK law.

  • Gross pay

Most people in the UK are able to receive a portion of their income tax-free. The current rate (2019/20) is £227 per week. This is known as your gross pay.

  • Income tax

Gross pay is subject to income tax at 20% Anything you earn above £892 per week is taxed at 40%. Earnings over £150,000 per year are subject to 45% income tax.

  • Employees’ National Insurance

As you are an employee of the Umbrella company, you have to pay National Insurance, currently at a rate of 12% on income between £162 and £892 per week (from 16 until state pension age). Earnings above £892 per week are subject to 20% National Insurance.

  • Employers’ National Insurance

Anyone who pays you a salary has to pay Employers’ National Insurance too, at a rate of 13.8% on pay above £162.

The impact on your take-home pay

As your gross pay level increases, the amount taken in National Insurance and tax also goes up, as you can see in the graph below.

This means the amount of take-home pay you get as a percentage of the assignment rate actually falls, as shown in the graph below.

So, if you are offered take-home pay of more than 85%, then something is wrong, and it’s likely that your Umbrella is not following the rules.

How do non-compliant Umbrellas bend the rules?

Most commonly, non-compliant Umbrellas deduct things from your gross pay before they calculate the tax that’s due. That way, you normally pay a bit of tax, which feels reassuring (after all, if you weren’t paying any tax you might be more suspicious). However, that tax payment is simply intended to make you feel comfortable with the arrangement. What you’ll find later is that you’re not paying enough tax for the gross pay you’ve received.

For example, the Umbrella might tell you they will pay you £500 per week, from which they’ll taken extra fee of 10% (£50). Of the rest, you get half described as a salary, and the other half called a loan, which they say is not a taxable payment.

If it transpires later to be a taxable payment (and this is usually the case) then you’ll have paid almost no tax, when in fact you should have paid around 25% (£125).

You will have also paid extra fees to someone else, which you’re unlikely to get back, so when you do end up paying tax, and possibly penalties and interest as well, you’ll end up much worse off than you would have been if you’d used a compliant Umbrella in the first place. I suspect that you probably wouldn’t have been afforded the full employment right Umbrella workers are entitled to either – so it’s a bad situation all-round.

Choosing a compliant Umbrella company

These so-called ‘enhanced take-home pay schemes’ are nothing new but given the pending change to IR35 in the private sector we can expect to see more coming to market, making life even more confusing for contractors.

As well as understanding what your take-home pay should be, you can safeguard yourself by choosing an FCSA accredited Umbrella company, like JSA.

Our Umbrella service is designed around compliance, ensuring we, the contractors we support and our recruitment agency partners are fully compliant. As accredited members of the FCSA, we have been independently tested and the audit disclosed to HMRC.

Need further help?

We appreciate it can be confusing to work out what your take-home pay should be. Please get in touch with our expert contractor accountants for a free, no-obligation pay illustration which will show you how your specific take-home pay would be calculated.

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