Before you register with an umbrella company, you may decide to get a few illustrations to compare your net take home. Despite providing the same day rate for the calculations, your monthly illustrations are showing different take home pay figures. Our blog explains why umbrella companies may be quoting you differently.
What deductions are included in the calculation?
As an employee of an umbrella company, you can expect to see deductions for Employment Costs, as well as PAYE tax and National Insurance Contributions. Your illustration (and payslip once you register) should clearly show all these deductions which are calculated per UK tax law.
While high pay retention may seem attractive, these seemingly tax efficient umbrella companies are more than likely promoting a tax avoidance scheme. Using a tax avoidance scheme could land you in serious trouble with HMRC, and you will be required to pay back all the tax you owe.
Please refer to our blog for more information about what deductions you can expect when working through an umbrella company.
Expenses have been included in your illustration
Contractors working through an umbrella company were previously able to claim a variety of expenses in addition to travel and subsistence, but this is no longer the case. Expenses must be approved by your recruitment agency or end client and paid over in addition to your standard rate.
Some umbrella providers may include expenses as part of your illustration, which increases your take home pay. Once you register, you may find you are unable to claim these expenses as you are subject to SDC.
Your taxable income exceeds £100,000 per annum
Not all taxpayers can benefit from the personal tax-free allowance. Once your income exceeds £100,000, your allowance will be reduced by £1 for every £2 that your adjusted net income is above the threshold. If your income is £125,000 or above your allowance will be zero.
If your projected personal taxable income exceeds £100,000 per annum, you should expect to see the abatement of tax-free personal allowance included in your umbrella illustration.
Don’t be fooled by a higher take home pay illustration – regardless of what you are quoted, if you are above the threshold, the abatement will be applied to your pay. Resulting in a lower net take home than you were expecting.
Churchill Knight Umbrella’s illustrations are transparent and include the abatement of your tax-free allowance. This will give you an accurate idea of what you could take home each month and enable you to make an informed decision about which provider to use.
Weeks included in the umbrella illustrations
Umbrella illustrations are based on the assumption of working either 52 or 48 weeks per full tax year.
Churchill Knight Umbrella’s monthly illustrations are based on 52 working weeks. We do this because there are not always 20 working days in a month and it gives a more accurate average over the year.
A yearly calculation would be based on the assumption of working 48 weeks per full tax year to take into consideration bank holidays and annual leave. We will adjust our calculations if your working pattern is different.
Please be aware that some providers may adjust the number of working weeks used in the calculation to produce a higher take home pay illustration. Always check with the provider what the illustration is based on before registering with the company.
The tax code used to calculate the illustration
It is crucial you understand which tax code has been used to calculate your take home pay illustration. Some providers may use a tax code that gives you a greater tax-free allowance, so your take home pay seems higher.
The illustration provided by umbrella companies should show which tax code has been used – if it has not, you should always ask for your reference.
Churchill Knight Umbrella’s illustrations are based on a 1250L tax code which includes the £12,500 tax-free Personal Allowance. We will only use a BR tax code in our illustrations if your contract work is a secondary form of employment, alongside your main form of employment.
If you are a Scottish taxpayer please let us know, our calculators have a Scottish tax code option which take into account the Scottish allowances and will give you a more accurate take home illustration.
Previous earnings and any tax paid in the current financial year are not taken into account as we will not know your tax code until you register with us – this may affect any tax due.
The Umbrella Margin
To cover the administrative cost and the process involved in running payroll, umbrella companies charge a margin. All compliant umbrella companies operate in the same way and one of the ways providers can compete is their margin.
If every umbrella company charged a weekly margin of £25 – contractors take home would be the same.
An umbrella company will retain the margin before any tax or National Insurance is deducted – this is more tax-efficient for the contractor. The amount retained is known as the Gross Margin. The Net Margin is what is deducted from your pay.
If you have a weekly contract rate of £1,000.00 and have been quoted a margin of £25.00 –this figure could be the Gross Margin. If it is the Gross Margin, then the actual value that would be deducted from your pay is not £25.00, it is in fact £14.86 (the Net Margin).
Some providers are misleading their clients by only quoting the Net Margin in their illustrations, rather than being transparent about how much they will retain. When comparing providers make sure you are using illustrations that display the margin in the same way.
Churchill Knight Umbrella outlines both the Gross Margin and the Net Margin in our umbrella illustrations – giving you a clearer idea of what we retain.
Holiday Pay can be accrued or advanced
Holiday Pay is an area that causes a lot of confusion. It is important to note that Holiday Pay is a re-allocation of your money and you can choose whether to have it accrued or advanced.
If you opt to have your Holiday Pay accrued, it will be retained by your umbrella company and paid into a pot which you can draw from at a later date. For example, if you had a holiday planned and knew you wouldn’t be working, you could have your Holiday Pay paid to you.
The other option is to have your Holiday Pay advanced and paid to you along with your normal salary each week/month. If you request an illustration from Churchill Knight Umbrella you will notice that we show Holiday Pay as advanced, this is because this is the option most contractors choose.
For more information about Holiday Pay and how it works, please refer to our blog.
What makes umbrella companies different from one and other?
The level of service offered and the additional extras are what sets one umbrella company apart from the other. For no extra cost, Churchill Knight Umbrella provides the following for all of our clients:
- Free £25 million insurance cover
- Same Day Faster Payments as standard
- Churchill Knight Rewards
- An online portal and state-of-the-art app
- And more!
Have you been let down by an untrustworthy umbrella company? Switch to us!
We believe in building relationships and are honest and transparent from the start. Our expert consultants will provide you with an accurate take home pay illustration and explain all the deductions you can expect to see. From enquiry to sign up, they are informative every step of the way and ensure you are comfortable throughout.