A Guide to Umbrella Company Calculations

Sadly, there are tax avoidance schemes out there that are targeting honest ad hard working contractors. Compliant umbrella companies will process your payments according to the HMRC tax system – Pay As You Earn (PAYE). This means you’ll be paid your net salary after the umbrella has sent the appropriate deductions to HMRC on your behalf (income tax, National Insurance, etc.). Therefore, your take home pay retention with an umbrella is likely to be between 60% and 70% if you are in the basic rate tax range.

Tax avoidance schemes have been known to present contractors with calculations that will see them retain upwards of 85% of their money. This type of pay retention is entirely unfeasible and indicates that you won’t be paying the correct amount of tax.

Engaging with a tax avoidance scheme could have severe consequences, and you could be landed with significant, life-changing penalties. Always make sure that umbrella company calculations you request are processed with PAYE. And we recommend you read our guide: How to spot a tax avoidance scheme.

Due to legislation introduced by the government in 2016 (supervision, direction and control), most umbrella companies will not process expenses for their employees. Unfortunately, a small selection of umbrella companies will include expenses in take home pay calculations to inflate contractors projected pay retention. This is a deliberate tactic to mislead contractors and to try and win more business. No umbrella can guarantee that a contractor is eligible to claim any expenses from the first conversation, so including them in an illustration is not a true representation.

Churchill Knight Umbrella will not include expenses in our umbrella company calculations because we believe this is misleading.

To give you the most accurate calculation possible, we base our calculations on the standard 1250L tax code (for the tax year 2020/21). This includes the annual £12,500 tax-free allowance. Not many, but some umbrella companies use different tax codes to reduce the contractor’s tax liability, and as a result, inflate their take home pay projection. In reality – this is simply an unethical tactic to try and mislead people. We are happy to use a BR tax code in our umbrella illustrations if you are contracting as a secondary form of income, and it’s not your primary employment. Please speak to us for more information.

Higher earners will begin to lose their personal allowance after reaching a certain threshold of projected annual taxable salary, and many umbrella companies forget to take this into account when they prepare their calculations. For every £2 that an employee earns over £100,000, they lose £1 of their personal allowance. When you hit £125,000 in projected taxable salary, you lose your full annual tax-free allowance.

When you get a calculation from Churchill Knight Umbrella, we take this into consideration – to try and ensure you’re given the most accurate projection possible.

To come to the most accurate illustration of take home pay possible, we base our weekly illustrations on 48 weeks per year, and our monthly illustrations on 21.66 average days. This is the closest estimation of take home pay we can calculate without having a worker on our payroll.

Other umbrella companies may calculate on a lower number of weeks or days to make the take home salary appear higher, and we feel this is not an accurate reflection of how a contractor works.

Churchill Knight Umbrella will always ask if you are currently paying back a student loan because student loan deductions will slightly reduce your take home pay. Make sure if you contact an umbrella company for a calculation, they take your student loan on board.

Also, you may be interested in contributing to a pension. Speak with the adviser and make this evident before you’re issued with an umbrella company calculation. And, when you get the calculation, double-check the necessary deductions are listed as they should be.