Contractors’ Questions: What should my umbrella company take-home pay be?

Contractor’s Question: Roughly, how much should an umbrella company be paying me once tax and other deductions come off from my rate? I’m new to umbrella company working having previously only ever used my own limited company to secure contracts.

Expert’s Answer: First of all you need to understand what rate it is that you are being offered by the agency or the end-client.

If they are quoting you a ‘PAYE rate,’ then this is the figure that is subject to Employee NI and PAYE tax – and this would usually follow an inside IR35 determination and working via agency PAYE.

However if the agency is stating that the rate is an ‘Umbrella Rate,’ then you will see the employment costs met from that day rate before the equivalent taxable salary is reached.

Crunching the numbers

So let’s take a look at the figures. For someone who would be a 40% tax payer, i.e. their taxable salary is predicted in excess of £50,000 per annum, then the take-home pay via an umbrella would normally be anything in the region of 52-58% take-home from that original day rate quoted. This is assuming as standard tax code and that one tax-free personal allowance has been applied.

In April 2020, Key Information Documents were made a mandatory requirement that all agency workers are entitled to. It’s a provision that should be forthcoming from the agency, and these documents should enable you to see exactly what you are getting paid.

So let’s recap. The 'Agency PAYE rate' is a taxable salary, which is subject to Employee NI and PAYE tax, while the 'Umbrella Rate' is the invoice value being raised to the agency or end-client. But how do you look at the comparable rate between these rates?

Let's take an example

Well, from the Umbrella Rate, simply deduct the Employer NI, the Apprenticeship Levy and the umbrella company’s margin -- the figure you end up with is the comparable taxable salary.

Example: £400 per day as an ‘Umbrella Rate’.

£2,000.00 per 5 day invoice value less Employer NI (£217.95); less Apprenticeship Levy (£8.74); less the umbrella’s margin (£25.00), leaves £1,748.31 per week.

So assuming 5 days worked, this gives a comparable taxable salary of £349.66 per day.

So on £400.00 per day via the ‘Umbrella Rate,’ the equivalent ‘Agency Rate’ would be £349.66 to net the same figure into your bank account. Some further examples are in the following table:

A word to limited company contractors going brolly because of IR35 changes

As private sector IR35 reform approaches, many contractors are now having to look at the knock-on effect on their income by accepting an umbrella company-required role, and with that comes the thoughts about what to do with their limited company.

Realistically, leaving the PSC open has no significant impact on the new earnings via an umbrella, unless you are still looking to draw any PAYE income from the company (make sure you consider the furlough scheme if this is relevant).

Dual employment alert (and other HMRC considerations)

When operating via the umbrella, if you have not 'P45’d' yourself from the limited company, then it could leave HMRC seeing that you have ‘dual employment.’ The ramifications of this could mean that HMRC start to tax all of your income at 20% or, an even a worse-case scenario, at a heftier 40%! So when money in your pocket has already been diminished (due to moving from the higher take-home that PSCs tend to offer), this is an added issue that you could probably do without! Plus, reaching HMRC on the phone amid the current covid-19 pandemic is proving frustrating for many at this time, so it’s worth avoiding if possible.

But there is something else you should do. Once your new umbrella company has paid you, check your personal tax account online. If you take a look at what HMRC estimates your PAYE earnings for the year to be, you will find that you are taxed on that basis, and if your assignment through the brolly is only likely to be short-term before returning to the PSC, then this estimate may not be wholly accurate, and you can look to update this.

Eventually, the PAYE system will catch up with itself and if for any reason you have been overtaxed due to predicted earnings via the umbrella, then this will resolved at the end of the year, hopefully in a PAYE refund to you.

The expert was Lucy Smith, managing director of Clarity Umbrella.