Your Results

Net Income

Net income is your total taxable income before any Personal Allowances, less any qualifying pension contributions. Your personal allowance is reduced by £1 for every £2 that your net income is above £100,000. Your allowance is zero if your income is £125,140 or above. If your net income exceeds £150,000, you will likely need to submit a Self-Assessment tax return.

Take Home

Take home is the amount you receive into your personal bank account after deducting all taxes, accrued holiday pay and student loan contributions.

Total Capital

Total capital consists of your take home pay, plus any pension contributions and accrued holiday pay. It is designed to give a more accurate representation of the overall financial gain from a contract and can be compared against the same figure in our Outside IR35 Calculator.

Annualised Earnings

An annualised calculation estimates how much you will earn for a full year based on a defined working time variable: hours, days or weeks. As a frame of reference, a standard year has 260 working days, with most contractors aiming to work between 220 and 230 days.

Specific Dates

If you know a contract's start and end date, you can enter it here to calculate how much you will earn over a specific period. Bank holidays are automatically excluded from the number of working days.

The specific dates functionality only works if the timing input is set to ‘Per Day’.

Tax Year

By default, the current tax year is applied, but if you wish to see calculations for other years, you can select them from the drop-down menu. Where tax rates change during the year, a blended rate is applied.

Tax Code

1257L is the standard tax code used by most people. If you are unsure of your tax code but think you will earn over £100k, leave the settings on Standard. The tapered personal allowance will be considered automatically.

If you live in Scotland, you pay a different rate of income tax. You'll pay the same rate as the rest of the UK on dividends.

Non-Standard Tax Code

HMRC may provide a non-standard tax code if your situation calls for it. The letter refers to your specific situation and is used to adjust your personal allowance. Most codes also contain a number, which usually refers to the amount you can earn before any tax is due, divided by 10.

National Insurance

The NI category letter determines what contributions employers and employees need to make when running payroll. Most individuals have a NI category letter of A.

Other Income

Other income and dividends account for any other income received during the year that would usually be included on a Self-Assessment tax return. For income, this may be from a second job, property investment or a side hustle. Dividends would usually come from any qualifying investments held.

Student Loan

Student loans are repaid using different methods depending on when you started the course for which you took the loan and where you lived.

Salary Sacrifice

Some umbrella companies facilitate salary sacrifice arrangements, where a contractor agrees to reduce their pay, with the difference paid into their SIPP. The reduction in pay means lower income tax and national insurance (both employer's and employee's contributions).

These tax breaks make salary sacrifice the most popular choice for contractors who want to save for their future in a tax-efficient way.

Salary Sacrifice

As a contractor, you can make pension contributions from your personal funds or your company’s pre-tax income. Most limited company contractors will make their pension contributions through their company as it is more tax-efficient than contributing your funds as an individual. Pension contributions made directly from your company’s income are invested before tax, which means you will save the amount you would have paid in both income and corporation tax on the contribution

Unlike personal pension contributions, the amount that can be invested directly from your company income is not linked to the amount you take as a salary.

Salary Sacrifice

A salary sacrifice arrangement is where an employee agrees to reduce their pay, with the difference paid into their SIPP. The reduction in pay means lower income tax and national insurance.

Workplace Pension

Umbrella company contractors are automatically enrolled in a workplace pension scheme. Unlike permanent employees, umbrella workers are responsible for the employee's contribution (minimum 5%) and the employer's contribution (minimum 3%). Once enrolled, you're entitled to opt out or cease active membership.

Workplace Pension

Employees are automatically enrolled in a workplace pension scheme. Once enrolled, you're entitled to opt out or cease active membership.

Allowances

The Blind Person's Allowance is an extra tax-free allowance, meaning you can earn more before paying Income Tax.

The Marriage Allowance lets you receive a fixed amount of your spouse/civil partner's Personal Allowance, thereby reducing your tax bill.

Umbrella Margins

The umbrella company margin is the amount the umbrella company charges on each payment you receive. It's an administration fee, covering the cost of running your payroll and the other operational costs of running a business.

Holiday Pay

There are two main methods by which you can receive your holiday pay as an umbrella company contractor:

  • Advanced Payment: The umbrella company adds your holiday pay to your regular payslip. This option is the most preferred solution amongst umbrella company contractors
  • Accrual Method: The umbrella company sets aside your holiday pay until you decide to take annual leave or when you leave the company.

Apprenticeship Levy

The UK Government initiated the Apprenticeship Levy in April 2017 for all employers paying a wage bill of more than £3 million per year. Umbrella Companies that meet this criterion are required to pay 0.5% of their payroll each month as a levy tax, a charge they pass onto contractors.

Director’s Salary

You have four options:

  • Simplified: At £9,100, your salary is at the Secondary Threshold and below the Primary Threshold, so there is no employer's or employee's National Insurance (‘NI’) due. It is higher than the Lower Earnings Limit, so you will continue to earn NI credits. Although £9,100 is more straightforward regarding administration, you are roughly £180 worse off than the salary of £12,570 due to less of an offset against your corporation tax bill. This option is usually only chosen by contractors without an accountant, wanting to avoid the burden of making NI payments.
  • Tax Efficient: Most contractors choose £12,570, as this is the most tax-efficient option whereby you maximise your personal allowance. Although you must make NI contributions, this is offset by the additional corporation tax savings. £12,570 is the best salary for a company with multiple employees as your company becomes eligible for the employment allowance.
  • Other or None: The optimum salaries mentioned above are only advisable if the director has their total personal allowance. When the director has other income (such as a second job or from rental properties), it may be advisable to pay a different salary.
  • Employment Allowance: The employment allowance allows eligible employers to reduce their Employer’s National Insurance liability by up to £5,000. There are multiple criteria for eligibility, though the relevant one here is that a company is not eligible for the employment allowance if there is only one employee in the company and that employee is also a director.

    What this means in practice is that if you are a limited company contractor and you employ your spouse, you can both take salaries of £12,570 and use the employment allowance to reduce the Employer’s National Insurance liability to zero.

Second Employee

It is common for contractors to employ a spouse (or other family members) in their business as a second employee. It not only provides the opportunity to maximise tax efficiencies by paying them a salary and utilising their income thresholds, but also helps ease the administrative burden of running a Limited Company.

Retained Earnings

Owners of limited companies can plan a tax-efficient distribution of dividends by leaving surplus profit in the business and withdrawing it in a later tax year. The profit left within the company is known as ‘retained earnings’. Although corporation tax is still owed, no dividend tax is due until the money is paid to shareholders.

Business Asset Disposal Relief (‘BADR’)

Business Asset Disposal Relief (‘BADR’) is a form of tax relief that reduces the rate of capital gains tax paid to 10%, and most contractors can claim the relief when they decide to close their personal limited company. Retained earnings are a qualifying asset, meaning they are eligible for the reduced tax rate.

Joint Ownership

Joint Ownership Dividends are distributed according to the percentage of company shares owned by each shareholder, i.e. if a contractor and their partner each own half the company’s shares, they will each receive 50% of every dividend distribution.

Recurring Expenses

Limited company expenses are allowable expenses that your business can claim, they are subtracted from your revenue, reducing the amount of corporation tax you pay. You can only claim for the expenses you incur 'wholly and exclusively' during the everyday running of your business.

Recurring expenses may include accountancy fees, insurance, phone bills, professional subscriptions etc.

One Off Expenses

One off expenses include items such as computer equipment, training courses, eligible travel costs etc.

Bonus

Your bonus is paid in addition to regular pay.

overtime 1

Overtime refers to any hours worked that exceed your normally scheduled working hours.

overtime 2

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Taxable Benefits

A taxable benefits (or ‘benefit in kind’) is any non-cash benefit of monetary value provided by a company to an employee that isn’t ‘wholly and exclusively’ for the purposes of the business. They are often called 'perks', 'fringe benefits' or 'notional pay'.


Companies use benefits in kind to reward employees over and above paying their wages and bonuses. The rewards have a monetary value attached, so they are treated as taxable income.

Inside IR35 Calculator via an Umbrella Company

Our inside IR35 calculator looks at the financial implications of being caught by the IR35 tax legislation.

Enter the relevant information in the input fields and our Inside IR35 Calculator will calculate the impact of working Inside IR35 via an umbrella company. You can use this calculator to review a split of your tax and take home pay, as well as a detailed breakdown of your umbrella company workings.

Enter Your Contract Rate

£

Net Income

£0

Take Home

£0

Total Capital

£0

Detailed Inputs

Take Home and Taxes

Umbrella Company

Assignment Income -
Umbrella Margin-
Employer’s NI-
Apprenticeship Levy-
Employer’s Workplace Pension-
Employment Costs-
Gross Pay-
Salary Sacrifice Pension-
Employee’s Workplace Pension-
Umbrella income0

Take Home

Umbrella Income-
Other Income-
Dividends-
Total Earnings-
Income Tax-
Dividend Tax-
National Insurance-
Total Taxes-
Student Loan-
Accrued Holiday Pay-
Take home0

Income Tax, Dividend Tax and National Insurance

INCOME TAX RATE TAX
Totals -                     -

Inside IR35 Calculator Information

How to use the calculator

There are two ways to use the calculator:

(1) Simplified: We recognise that tax rules can be complicated, so all you need to do is populate the "Contract Rate" and "Frequency" input boxes, and we will do the rest. Our Inside IR35 Calculator has been pre-populated with the most common variables, so once you enter the contract rate, we can provide an accurate estimate of the financial implications of working Inside IR35 via an umbrella company. This is useful for those wanting to calculate an estimate of their take-home pay quickly or those who may not yet have access to all the relevant contract details.

(2) Advanced: Our calculator offers dozens of editable input fields for those wanting more precise control over the variables used in the Inside IR35 calculation. Our calculator uses the calculation methodologies prescribed by HMRC, so adjusting these input fields to represent the actual working arrangements of the Inside IR35 contract in question will provide an accurate breakdown between take-home pay and all relevant deductions.

What do ‘Your Results’ mean?

Net Income
Net income is your total taxable income before any Personal Allowances, less any qualifying pension contributions. Your personal allowance is reduced by £1 for every £2 that your net income is above £100,000. Your allowance is zero if your income is £125,140 or above. If your net income exceeds £150,000, you will likely need to submit a Self-Assessment tax return.

Take Home
Take home is the amount you receive into your personal bank account after deducting all taxes, accrued holiday pay and student loan contributions.

Total Capital
Total capital consists of your take home pay, plus any pension contributions and accrued holiday pay. It is designed to give a more accurate representation of the overall financial gain from a contract and can be compared against the same figure in our Outside IR35 Calculator.

What is IR35?

IR35 is an employment status test determining whether a contract points towards employment or self-employment. It combats tax avoidance by closing loopholes, ensuring contractors working the same way as permanent employees pay the same taxes.

If your contract is 'inside IR35', it points towards employment. Your working arrangements are similar to those of a permanent employee, so HMRC imposes broadly the same income tax and national insurance liabilities

If your contract is 'outside IR35', it points towards self-employment, and you can enjoy the tax efficiency that self-employment brings (as well as all the associated risks).

How does IR35 work?

IR35 applies on a contract-by-contract basis. For each contract, the relevant 'decision-maker' (usually the end client) prepares a Status Determination Assessment ('SDS'). The SDS looks at the engagement contract's wording and the contractor's day-to-day working practices and decides whether IR35 applies.

HMRC offer detailed guidance notes and an online tool to help decision-makers determine whether IR35 is relevant. Third parties also specialise in performing these assessments and providing insurance against a potentially incorrect determination.

Who does IR35 apply to?

Any contractor that is a UK resident for tax purposes has the potential to be impacted by IR35. Although the party responsible for performing the SDS can vary, if you are a contractor paying tax in the UK, you need to consider IR35.

This is a point that often confuses contractors. They mistakenly believe that if a potential client is overseas, then IR35 doesn't apply. Instead, they become responsible for the SDS, decide whether they are inside IR35, and hold the liability should this decision be wrong.

What is an umbrella company?

Umbrella companies act as employers to contractors for the length of a specific engagement, turning the self-employed into taxable employees. They employ contractors working on temporary assignments, serving as intermediaries between contractors and their clients (the end client or recruitment agency).

The role of an umbrella company is predominantly administratively focused. They manage timesheets, invoice the relevant party on behalf of the contractor, calculate and pay the required taxes and National Insurance contributions, and pay the remaining monies to the contractor (less any fees/margin for services rendered).

As contractors become employees for the time they work through an umbrella company, they are no longer subject to IR35 checks. As such, umbrella companies are the most popular choice for those required to work inside IR35. Clients often stipulate that contractors must work through an umbrella company if the contract is Inside IR35.

Umbrella company pay

To calculate an employee's gross pay, umbrella companies deduct statutory employment costs and their margin from the assignment income (the amount the fee payer is invoiced). The employment costs include Employers' National Insurance contributions (NICs) and the  Apprenticeship Levy . Employer's pension contributions are also deducted if applicable. Once these costs have been subtracted, you're left with your gross pay.

The margin is the only deduction retained by the umbrella company; all other deductions are made on behalf of either HMRC or a pension provider.

Why aren't expenses included?

Claiming expenses while working through an umbrella company is virtually impossible. Since April 2016, HMRC legislation has severely restricted what expenses contractors can claim while inside IR35.

While expenses can technically still be reimbursed, you cannot offset them against your earnings like you can while working outside IR35 through a limited company. Similar to permanent employees, all expense claims must be submitted, approved by the client, and paid in addition to your regular contract income.

No umbrella company can legally process anything other than client billable expenses for tax relief purposes. Any umbrella company that actively promotes otherwise should be avoided as they are almost certainly behaving unethically.

Assignment income

The assignment rate is the amount the umbrella company invoices the end client. It consists of employment costs, the umbrella company's margin, and the actual wages payable to you (your gross pay).

Umbrella company margin

Margin is the technical term for the fee that umbrella companies charge contractors. It's an administration fee (usually around £25 per week), covering the costs of running the payroll, insurance for the contractor, and other operational expenses involved in running a business.

The margin is commonly charged to you as a fixed weekly amount, or in some cases, it is a percentage deduction with a maximum cap based on your weekly gross agency rate (although percentage margins are rare nowadays). For example, if you become an employee of an umbrella company with a £22 per week margin, you will see a £22 deduction on your weekly payslip.

Umbrella company margins only apply when you're paid; if you are between contracts but remain on an umbrella company's books, the company will not subject you to any costs.

Employer's NICs

All UK employers, including umbrella companies, are required to make Employer's National Insurance Contributions to HMRC. As the umbrella company employs contractors but receives no benefit from the work performed, the contributions are passed to the contractor. They are calculated as 13.8% of your earnings above the Lower Earnings Limit.

Apprenticeship levy

The Apprenticeship Levy is a small tax levied on UK employers to fund new apprenticeships. All employers with annual pay bills of £3m or more must pay the Levy at 0.5% of the company's total wage bill, minus a fixed £15,000 yearly allowance.

For contractors, your umbrella company is your employer, and it must, by law, pay all employment taxes based on income generated by its employees. Umbrella companies pay these statutory employment costs from the funds received from your agency or end client. As the apprenticeship levy is one of these statutory costs, it will appear on your payslip alongside other statutory costs, such as the Employer's National Insurance.

Employer's pension contributions

As an employee of an umbrella company, you are eligible for a workplace pension. The minimum amount payable is 8% of your gross pay: 3% employer and 5% employee contributions. As employer contributions are deducted from the assignment rate, most contractors opt out of workplace pensions in favour of their salary sacrifice schemes.

Employee's pension contributions

A salary sacrifice pension contribution is where an umbrella worker exchanges part of their gross income to receive contributions directly into their self-invested personal pension (SIPP). This deduction is made before PAYE and NICs, making it a hugely attractive option for contractors.

Basic (statutory) pay

As your employer, Umbrella companies must pay you a minimum wage. This 'basic pay' is calculated as the hours you have worked in each billing cycle multiplied by the National Minimum Wage.

Holiday pay

Umbrella company employees are legally entitled to annual leave. Umbrella companies base the holiday pay their employees are entitled to on the European Working Time Regulations figure of 5.6 weeks in a year. By dividing 5.6 weeks by 46.4 weeks (the rest of the weeks in the year), you get a total of 0.1207, the percentage used to calculate annual leave. 12.07% is multiplied by Gross Taxable Pay to get the holiday pay amount.

As opposed to permanent employees, umbrella workers' holiday pay is considered when negotiating an assignment rate, it is not added on top. In other words, there is no uplift on top of pay.

There are two main methods by which you can receive your holiday pay as an umbrella company contractor:

  • Advanced Payment: The umbrella company adds your holiday pay to your regular payslip, meaning you're always up to date with your holiday pay entitlement. This option is the most preferred solution amongst umbrella company employees.
  • Accrual Method: The umbrella company sets aside your holiday pay until you decide to take annual leave or when you leave the company.

If 'Accrual Method' is selected, holiday pay will be deducted during the calculation of take-home pay as the contractor will not receive this money as part of their regular payslip. It is reserved until holiday is taken or the contract finishes. Holiday pay is added back when calculating total capital to ensure an accurate representation of the overall financial gain.

Commission

The final element in an umbrella company calculation is commission (or bonus). It is calculated as anything owed to the contractor above the basic pay and holiday pay. It acts as a balancing figure between these two pay elements and total taxable income.

Income tax

Like permanent employees, umbrella companies pay the contractor's wages via PAYE. The required tax and NICs are made at source and paid directly to HMRC.

Employee NICs

All employees must pay NICs on their taxable income, calculated as 12% of earnings above the primary threshold, up to and including the upper earnings limit, and 2% after that. It's important to note that this is in addition to the Employer's NICs already deducted from the assignment income.

Student loan repayments

If applicable, contractors employed by an umbrella company will make student loan repayments via PAYE, just like traditional employees.

Inside IR35 Calculator via an Umbrella Company

Our calculator looks at the financial implications of being caught by the off-payroll rules, having to work Inside IR35 via an Umbrella Company.

Enter Rate 0 per day edit

Assignment Income -
Umbrella Margin-
Employer’s NI-
Apprenticeship Levy-
Employer’s Workplace Pension-
Employment Costs-
Gross Pay-
Salary Sacrifice Pension-
Employee’s Workplace Pension-
Umbrella income0
Umbrella Income-
Other Income-
Dividends-
Total Earnings-
Income Tax-
Dividend Tax-
National Insurance-
Total Taxes-
Student Loan-
Accrued Holiday Pay-
Take home0
Calculator Inputs
£

Timing

Tax Year

Tax Code

Other Income

£
£

Student Loan

Pension

£

Allowances

Umbrella company

£
Start

Net Income

£0

Take Home

£0

Total Capital

£0

Inside IR35 Calculator Information

How to use the calculator

There are two ways to use the calculator:

(1) Simplified: We recognise that tax rules can be complicated, so all you need to do is populate the "Contract Rate" and "Frequency" input boxes, and we will do the rest. Our Inside IR35 Calculator has been pre-populated with the most common variables, so once you enter the contract rate, we can provide an accurate estimate of the financial implications of working Inside IR35 via an umbrella company. This is useful for those wanting to calculate an estimate of their take-home pay quickly or those who may not yet have access to all the relevant contract details.

(2) Advanced: Our calculator offers dozens of editable input fields for those wanting more precise control over the variables used in the Inside IR35 calculation. Our calculator uses the calculation methodologies prescribed by HMRC, so adjusting these input fields to represent the actual working arrangements of the Inside IR35 contract in question will provide an accurate breakdown between take-home pay and all relevant deductions.

What do ‘Your Results’ mean?

Net Income
Net income is your total taxable income before any Personal Allowances, less any qualifying pension contributions. Your personal allowance is reduced by £1 for every £2 that your net income is above £100,000. Your allowance is zero if your income is £125,140 or above. If your net income exceeds £150,000, you will likely need to submit a Self-Assessment tax return.

Take Home
Take home is the amount you receive into your personal bank account after deducting all taxes, accrued holiday pay and student loan contributions.

Total Capital
Total capital consists of your take home pay, plus any pension contributions and accrued holiday pay. It is designed to give a more accurate representation of the overall financial gain from a contract and can be compared against the same figure in our Outside IR35 Calculator.

What is IR35?

IR35 is an employment status test determining whether a contract points towards employment or self-employment. It combats tax avoidance by closing loopholes, ensuring contractors working the same way as permanent employees pay the same taxes.

If your contract is 'inside IR35', it points towards employment. Your working arrangements are similar to those of a permanent employee, so HMRC imposes broadly the same income tax and national insurance liabilities

If your contract is 'outside IR35', it points towards self-employment, and you can enjoy the tax efficiency that self-employment brings (as well as all the associated risks).

How does IR35 work?

IR35 applies on a contract-by-contract basis. For each contract, the relevant 'decision-maker' (usually the end client) prepares a Status Determination Assessment ('SDS'). The SDS looks at the engagement contract's wording and the contractor's day-to-day working practices and decides whether IR35 applies.

HMRC offer detailed guidance notes and an online tool to help decision-makers determine whether IR35 is relevant. Third parties also specialise in performing these assessments and providing insurance against a potentially incorrect determination.

Who does IR35 apply to?

Any contractor that is a UK resident for tax purposes has the potential to be impacted by IR35. Although the party responsible for performing the SDS can vary, if you are a contractor paying tax in the UK, you need to consider IR35.

This is a point that often confuses contractors. They mistakenly believe that if a potential client is overseas, then IR35 doesn't apply. Instead, they become responsible for the SDS, decide whether they are inside IR35, and hold the liability should this decision be wrong.

What is an umbrella company?

Umbrella companies act as employers to contractors for the length of a specific engagement, turning the self-employed into taxable employees. They employ contractors working on temporary assignments, serving as intermediaries between contractors and their clients (the end client or recruitment agency).

The role of an umbrella company is predominantly administratively focused. They manage timesheets, invoice the relevant party on behalf of the contractor, calculate and pay the required taxes and National Insurance contributions, and pay the remaining monies to the contractor (less any fees/margin for services rendered).

As contractors become employees for the time they work through an umbrella company, they are no longer subject to IR35 checks. As such, umbrella companies are the most popular choice for those required to work inside IR35. Clients often stipulate that contractors must work through an umbrella company if the contract is Inside IR35.

Umbrella company pay

To calculate an employee's gross pay, umbrella companies deduct statutory employment costs and their margin from the assignment income (the amount the fee payer is invoiced). The employment costs include Employers' National Insurance contributions (NICs) and the  Apprenticeship Levy . Employer's pension contributions are also deducted if applicable. Once these costs have been subtracted, you're left with your gross pay.

The margin is the only deduction retained by the umbrella company; all other deductions are made on behalf of either HMRC or a pension provider.

Why aren't expenses included?

Claiming expenses while working through an umbrella company is virtually impossible. Since April 2016, HMRC legislation has severely restricted what expenses contractors can claim while inside IR35.

While expenses can technically still be reimbursed, you cannot offset them against your earnings like you can while working outside IR35 through a limited company. Similar to permanent employees, all expense claims must be submitted, approved by the client, and paid in addition to your regular contract income.

No umbrella company can legally process anything other than client billable expenses for tax relief purposes. Any umbrella company that actively promotes otherwise should be avoided as they are almost certainly behaving unethically.

Assignment income

The assignment rate is the amount the umbrella company invoices the end client. It consists of employment costs, the umbrella company's margin, and the actual wages payable to you (your gross pay).

Umbrella company margin

Margin is the technical term for the fee that umbrella companies charge contractors. It's an administration fee (usually around £25 per week), covering the costs of running the payroll, insurance for the contractor, and other operational expenses involved in running a business.

The margin is commonly charged to you as a fixed weekly amount, or in some cases, it is a percentage deduction with a maximum cap based on your weekly gross agency rate (although percentage margins are rare nowadays). For example, if you become an employee of an umbrella company with a £22 per week margin, you will see a £22 deduction on your weekly payslip.

Umbrella company margins only apply when you're paid; if you are between contracts but remain on an umbrella company's books, the company will not subject you to any costs.

Employer's NICs

All UK employers, including umbrella companies, are required to make Employer's National Insurance Contributions to HMRC. As the umbrella company employs contractors but receives no benefit from the work performed, the contributions are passed to the contractor. They are calculated as 13.8% of your earnings above the Lower Earnings Limit.

Apprenticeship levy

The Apprenticeship Levy is a small tax levied on UK employers to fund new apprenticeships. All employers with annual pay bills of £3m or more must pay the Levy at 0.5% of the company's total wage bill, minus a fixed £15,000 yearly allowance.

For contractors, your umbrella company is your employer, and it must, by law, pay all employment taxes based on income generated by its employees. Umbrella companies pay these statutory employment costs from the funds received from your agency or end client. As the apprenticeship levy is one of these statutory costs, it will appear on your payslip alongside other statutory costs, such as the Employer's National Insurance.

Employer's pension contributions

As an employee of an umbrella company, you are eligible for a workplace pension. The minimum amount payable is 8% of your gross pay: 3% employer and 5% employee contributions. As employer contributions are deducted from the assignment rate, most contractors opt out of workplace pensions in favour of their salary sacrifice schemes.

Employee's pension contributions

A salary sacrifice pension contribution is where an umbrella worker exchanges part of their gross income to receive contributions directly into their self-invested personal pension (SIPP). This deduction is made before PAYE and NICs, making it a hugely attractive option for contractors.

Basic (statutory) pay

As your employer, Umbrella companies must pay you a minimum wage. This 'basic pay' is calculated as the hours you have worked in each billing cycle multiplied by the National Minimum Wage.

Holiday pay

Umbrella company employees are legally entitled to annual leave. Umbrella companies base the holiday pay their employees are entitled to on the European Working Time Regulations figure of 5.6 weeks in a year. By dividing 5.6 weeks by 46.4 weeks (the rest of the weeks in the year), you get a total of 0.1207, the percentage used to calculate annual leave. 12.07% is multiplied by Gross Taxable Pay to get the holiday pay amount.

As opposed to permanent employees, umbrella workers' holiday pay is considered when negotiating an assignment rate, it is not added on top. In other words, there is no uplift on top of pay.

There are two main methods by which you can receive your holiday pay as an umbrella company contractor:

  • Advanced Payment: The umbrella company adds your holiday pay to your regular payslip, meaning you're always up to date with your holiday pay entitlement. This option is the most preferred solution amongst umbrella company employees.
  • Accrual Method: The umbrella company sets aside your holiday pay until you decide to take annual leave or when you leave the company.

If 'Accrual Method' is selected, holiday pay will be deducted during the calculation of take-home pay as the contractor will not receive this money as part of their regular payslip. It is reserved until holiday is taken or the contract finishes. Holiday pay is added back when calculating total capital to ensure an accurate representation of the overall financial gain.

Commission

The final element in an umbrella company calculation is commission (or bonus). It is calculated as anything owed to the contractor above the basic pay and holiday pay. It acts as a balancing figure between these two pay elements and total taxable income.

Income tax

Like permanent employees, umbrella companies pay the contractor's wages via PAYE. The required tax and NICs are made at source and paid directly to HMRC.

Employee NICs

All employees must pay NICs on their taxable income, calculated as 12% of earnings above the primary threshold, up to and including the upper earnings limit, and 2% after that. It's important to note that this is in addition to the Employer's NICs already deducted from the assignment income.

Student loan repayments

If applicable, contractors employed by an umbrella company will make student loan repayments via PAYE, just like traditional employees.