As a contractor working inside IR35 your umbrella company pays you via PAYE, therefore the amount amount of tax and national insurance deducted from your pay depends on the level of income earned up to that point in the tax year and the amounts deducted so far.
Being inside IR35 means you need to make provisions for paying Employers National Insurance on any income earned - but this figure can have allowable expenses and umbrella fees deducted before being calculated. Our calculator will take care of calculating your entire contract value by taking the contract start and end dates, using the contract rate you charge and applying it over workable days you set.
It can skip bank holidays and weekends, or limit itself to a certain number of work days per week. You input your umbrella company payslip frequency, i.e Weekly, Monthly and the calculator starts generating your payslips and a summary of the total income over the contract period.
According to the Department for Business, Innovation and Skills (DBIS) there are around 4 million professional contractors working in the UK, and of these 14 percent use umbrella companies to take care of contractual and pay administration. That is a lot of admin, but why is this required?
In 1999, the then Chancellor, Gordon Brown announced new legislation called IR35, which would attempt to kerb the tax avoidance possible by using 'Personal Service Companies'.
It would create tests to classify the employment status of an individual working under such a company to make sure they cannot seek taxation advantages that are possible by not being classified as an employee.
Pre IR35, it was possible for an individual to have a contract that would start on Monday and end on Friday. A new contract would starting the following Monday and the cycle would repeat. By doing this the individual would be paid directly into company set up to take the contractual payments, and the would be employer would not have to pay any employer related national insurance contributions. A saving for the employer and employee, who would have available business tax reliefs and the ability to be remunerated via dividends thus avoiding personal national insurance contributions too.
People can be caught out by IR35 legislation and made to repay avoided taxes on top of fines for evasion.
Umbrella Companies were set up to provide a pay solution for people who know they are working within IR35, i.e they will be classed as employees under the legislation and thus should be paying employer related contributions as they would have to if permanently employed with salary.
The Umbrella will provide payroll for the contractor, by acting as a go between with the Contractor agency on one end and the Client (the actual company where the work is done) on the other. All the contractor would have to do is submit a timesheet and any expense claims to the Umbrella.
The Umbrella receives payment from the agency, deduces the 'salary' for the contractor, pays the relevant NI and PAYE taxes and forwards payment to the contractor.
Alongside the obvious admin savings, the other main advantage of using the Umbrella is the ability for the pay to be made after expenses are claimed, thus reducing the tax burden. Example expenses include travel, food and drink (although possible only if working away and even then may be disallowed), accommodation, professional subscriptions and specialist equipment required for work.
If you have a contract rate of £1,500 per week but can legitimately provide proof of £500 of allowable expenses in the week, the Umbrella will only forward a salary to you of £1,000 upon which tax, national insurance and employers national insurance will be calculated. The £500 would also be forwarded to you but as a non-taxable expense reimbursement.