As mentioned briefly in the article about PAYE umbrella companies, the recent introduction of the MSC legislation means that for those contractors who decide to accept their payments through a third party as opposed to through their own limited company, their salary and payments must be processed through the PAYE scheme. The amount that needs to be contributed is always decided by HMRC and is dependent on how much you are earning. The tax and other related fees when using an umbrella company come in the form of two main payments.
The first, is the necessary National Insurance Contribution although there are actually 2 forms of National Insurance Contributions – employees contributions and employers contributions. However, employers contributions are not an additional fee a contractor would need to worry about as the value of the employers’ NI contribution is subtracted from the gross rate offered in the agency contract before the umbrella company calculates their total salary.
For an up-to-date understanding of what the situation is it’s important to keep checking the HMRC although an comparisoncontractor would generally make their contractors aware of any changes. However, both employees’ and employers’ NI for 2010/2011 are payable on any income over £111 per week and are set at 11% and 12.8% respectively. Employees’ National Insurance is capped at £844.00 per week; for earnings over this amount the percentage deducted reduces to just 1%. Employer contributions are at 12.8% and are uncapped.
The other big payment for contractors and indeed the vast majority of people in the UK, is income tax deductions. Income tax is also calculated according to percentages over and above allowances set by HMRC. Everyone has a tax code which declares their tax free pay e.g. the standard tax code for 2010/11 is 647L, which means that you can earn up to £6475 per annum before you will be liable for income tax.
Every pound you earn over your tax free allowance will be taxed at 20% up to £37,400; every pound you earn over £37,400 will be taxed at 40%. For income over £100,000 per year the tax free allowance will drop by £1 for every £2 over £100,000 that is made. Income over £150,000 are taxed at 50%. Remember though, many contractors will be able to claim additional tax-free benefits through expense claims via the umbrella company. Those that are payable by your agency or client will be reimbursed to you in full and are referred to as ‘chargeable’ expenses. Expenses that are not refundable through your agency or client are referred to as ‘con-chargeable’ and are processed by the umbrella company as a tax benefit. For more information on expenses and the difference between chargeable and non-chargeable expenses, please read the relevant article
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