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PAYE Income Tax
Umbrella Companies deduct Pay as You Earn (PAYE) Income tax and Class 1 National Insurance at source from salaried income before paying the net sum directly into a contractor’s bank account. This means there is no need to worry about making a provision for an end of year tax return.It is possible to reduce the level of Income Tax and Class 1 National Insurance payable by claiming legitimate business expenses incurred during a contract assignment. The value of these business expenses reduces the overall gross level of salary thereby also reducing the level of Income Tax and National Insurance paid.
What is Income Tax?
Income Tax is quite simply a tax on Income. The level of Income tax you pay depends upon the gross income you receive. Not all Income is taxable (everyone gets a personal allowance) and you are only taxed on income above the personal allowance.Income Tax is calculated using a number of tax rates and a series of tax bands. The Income Tax Bands for the 2009 – 2010 tax year are detailed below.
| Description | Rate of Tax | Taxable Band |
|---|---|---|
| Basic Rate | 20% | £0 - £37,400 |
| Higher Rate | 40% | £37,400 + |
Tax Codes
A tax code is used by an umbrella company to calculate the correct amount of tax to deduct from your salaried income. If the wrong code is used you could wind up paying too much or too little in tax.A tax code is normally made up of 3 numbers and a letter although some tax codes are simply made up of two letters. There are many letters with many different meanings but only a few apply to workers who may use an Umbrella Company. These are detailed below:
- Code L: Used for those individuals eligible for the basic personal allowance
- Code K: Used where total allowances are less than total deductions
- Code BR: Taxes all income at the basic rate of tax of 20%
- Code D0: Taxes all income at the higher rate of tax of 40%
- Code NT: Used where no tax is to be deducted
Codes BR and D0 are normally used where the job being undertaken is a second job. No personal allowance applies to this income as it is already being used by the primary job.
