Any contractor considering operating through an umbrella company will want the answer to one particular question: how much will you take home through the umbrella company?
As a contractor you work hard for your money, so it’s only natural that you want to ensure you are reaping the rewards.
To help make things a little easier, in this guide Umbrella Broker take a look at how much you can take home through an umbrella company, so you can see if this is the best option for you.
How do umbrella company contractors get paid?
Before we get in to how much you will take home through an umbrella company, let’s first look at how umbrella contractors get paid. After all, this differs from the likes of limited company contractors.
An umbrella company makes the contractor their employee. This means that the contractor is put onto the umbrella company’s payroll.
The umbrella company is responsible for collecting the contractor’s fee from the client. They will then process the fee through the PAYE tax system. This deducts the correct levels of tax and National Insurance from the contractor’s pay. Once this has been processed, the umbrella company will pay the contractor the remainder.
This is the most common way of paying tax in the UK, with most employees paying their contributions through this system.
This is different to off-payroll workers, such as the self-employed. This group of contractors will instead collect the fee from the client themselves and will have to calculate and deduct the tax and National Insurance they owe themselves. Once they have done this, they will pay the amount owed through a self-assessment tax return.
That’s how umbrella company contractors will get paid, now let’s look at how much you will take home.
How much do umbrella company contractors take home?
To work out how much you will take home as a contractor you should start by working out how much you will pay in tax and National Insurance.
Work out tax and NI deductions
As umbrella company contractors pay tax through the PAYE tax system, this means the amount of tax they will pay is subject to current UK tax bands.
Tax bands for 2021 – 2022 are as follows:
- Personal allowance: up to £12,570 contractors will pay 0% tax
- Basic rate: between £12,571 – £50,270 contractors will pay 20% tax
- Higher rate: between £50,271 – £150,000 contractors will pay 40% tax
- Additional rate: over £150,000 contractors will pay 45%
It is worth noting that you do not receive a personal allowance on taxable income over £125,140.
If you live in Scotland the tax bands are slightly different:
- Personal allowance: up to £12,570 contractors will pay 0% tax
- Starter rate: between £12,570 – £14,667 contractors will pay 19% tax
- Basic rate: between £14,667 – £25,296 contractors will pay 20% tax
- Intermediate rate: over £25,296 – £43,662 contractors will pay 21% tax
- Higher rate: between £43,662 – £150,000 contractors will pay 41%
- Top rate: over £150,000 contractors will pay 46%
It is also worth noting that the personal allowance is reduced by £1 for every £2 earned over £100,000.
Find out more about tax bands in Scotland in this guide.
As well as tax, umbrella contractors must also pay National Insurance. This will again depend on how much you earn.
For employees, this is deducted as follows:
- Umbrella contractors earning below £9,568 pay 0% NI
- Umbrella contractors earning between £9,568 – £50,270 pay 12% NI
- Umbrella contractors earning more than £50,270 pay 2%
Now, you should be able to calculate how much you will be paying in deductions.
Next, you should look at how much you will pay in pension contributions.
Deduct pension contributions
The next step in working out how much you will take home as an umbrella company contractor is to work out how much you will be paying in pension contributions.
The minimum you can contribute to your workplace pension pot is 5% of your salary. Your employer, the umbrella company, will then contribute at least 3%.
You can choose to contribute more if you wish, you will just need to account for this when making your deductions.
Umbrella company fees
The next thing to account for when establishing how much you will take home through an umbrella company is the umbrella company fee you will pay.
Umbrella companies charge fees in exchange for the range of services and benefits they give to contractors.
Although this is an additional cost to the contractor, the good news is that umbrella company fees count as legitimate expenses meaning they are taken off your income before tax is deducted, reducing the amount you have to pay in tax.
Some more good news is that umbrella company costs are competitive, meaning that the cost of using an umbrella company remains fairly low.
In fact, you can expect to pay in the range of around £80 – £100 per month.
