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This is your step-by-step guide on how we calculate your take-home pay. The figures below are an example based on £1000 income to our umbrella company and a standard tax code (1257L).
This is the total amount the umbrella company invoices to the agency/client, as applicable. In this case, the gross umbrella income is £1000 and is made up of hours / days worked at the agreed agency rate, plus any reimbursed expenses / bonuses, etc.
Before calculating your taxable income, the umbrella company deducts employment costs, which typically include the following:
Margin: Our deduction for the services we provide
Employers’ costs: employer's national insurance contributions | Apprenticeship Levy | employers’ pension contribution | Holiday pay
Your gross pay is made up of the following elements:
Basic pay: This is national living wage, which would be £12.21 (if over 21 years old) calculated by the hours worked.
Holiday pay: This is worked out as a percentage of your commission and basic pay combined, and as a minimum will be 12.07%.
Commission: This is what’s left from your gross pay after basic pay and holiday pay have been allocated.
Your gross pay is then subject to standard deductions which vary depending on your tax code. However, in this example we have used the standard 1257L tax code, which gives a personal allowance of £12,570 annually.
PAYE: The first £242 of your weekly earnings (or £1048 of your monthly earnings) is tax-free. Anything above that is taxed at 20% (if you are a basic rate tax payer). These values differ for Scotland.
Employees National Insurance: Calculated at 8% of your earnings which are subject to national insurance.
Pension: Calculated at 5% of your qualifying earnings. We deduct 4% and our workplace pension provider claims the remaining 1% back from the government.
Total umbrella income: £1000:
Less Margin: £24.50
Less employer’s NI & Apprenticeship Levy: £115.55
Less employers’ pension contribution: £21.55
Less holiday pay: £90.29
Gross pay: £838.40: made up of basic pay: £610.50; commission: £137.61 & holiday pay: £90.29
Less PAYE: £119.20
Less employee NI: £47.71
Less employees’ pension: £28.74
Take-home pay: £642.75
Your exact take-home pay can vary slightly depending on your tax code, any allowable expenses, pension contributions, or other deductions. However, when using all the same assumptions and variables, all compliant umbrella companies should deliver the same take-home pay so be wary of any which are making promises of higher-than-average pay.
Understanding your take-home pay is critical. It will not only help you to avoid finding yourself in a tax avoidance scheme but you’ll also be able to spot any potential hidden deductions. HMRC provide further guidance on how to work out your take-home pay - https://www.gov.uk/guidance/work-out-pay-from-an-umbrella-company
Make sure you’re familiar with how a non-compliant provider may behave. Our article on ‘how to spot a dodgy umbrella company’ will help you to spot the signals.
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