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Umbrella Company Tax
Umbrella Companies offer freelance contractors a safe and secure way of maximising contract income while also minimising business administration. With an umbrella company solution such as Expat Advantage or Payroll Umbrella there is no need to worry about IR35 or the MSC legislation as all contract income is paid through the Pay as You Earn (PAYE) scheme. The umbrella company also allows the contractor to claim legitimate business expenses incurred during the contract on a tax and national insurance free basis. To find out more about umbrella company solutions call Commonwealth Contractors now on 0800 294 4388 or submit your details and we will get right back to you.The PAYE Scheme
In the UK income from employment is taxed at source and paid directly to the government by the employer. The Pay as You Earn (PAYE) system is the government’s means of collection. Before a net salary payment can be made the following deductions must be made- Income Tax (Payable by the Employee)
- Class 1 Employees National Insurance (Payable by the Employee)
- Class 1 Employers National Insurance (Payable by the Employer)
What is Income Tax?
Income Tax is quite simply a tax on your 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.IIncome Tax is calculated using a number of tax rates and a series of tax bands. The Income Tax Bands for the 2008 – 2009 tax year are detailed below.
| Description | Rate of Tax | Taxable Band |
|---|---|---|
| Starting Rate | 20% | 0 – 36,000 |
| Higher Rate | 40% | Over 36,000 |
It is important to bear in mind that the tax bands detailed above apply to income after tax allowances. The Personal Allowance for the 2008-2009 tax year is £5,435. Therefore in order to have taxable income in basic rate band of 20% you must fist earn £5,435 in the tax year.
What is Class 1 Employees National Insurance?
Class 1 Employees National Insurance is payable by an employee on salaried income. It is levied at a rate of 11% between the primary threshold, £5,460 (annual) and the upper earnings limit, £40,040 (these are 2008-9 figures). Any Income above the upper earnings limit is subject to Employee’s National insurance at a rate of 1%. Therefore a ‘cap’ is in place to reduce the level of national insurance paid by high earners.Employees Class 1 National Insurance is applied as detailed below (again, these are 2008-9 figures):
- 0% below the Primary threshold of £105 per week
- 11% between the Primary threshold (£105 pw) and the Upper Earnings Limit (£770 pw)
- 1% on earnings above the Upper Earnings Limit of £770 per week (£40,040 per annum)
What is Class 1 Employers National Insurance?
Employer’s National Insurance is payable by the employer on an employee’s salary and benefits. Employer’s National Insurance is levied at a flat rate of 12.8% above the secondary threshold of £5,460 (annual); there is no upper limit or ‘capping’.Employer’s Class 1 National Insurance is applied as detailed below:
- 0% below the Secondary threshold of £105 per week (£5,460 per annum)
- 12.8% above the Secondary threshold of £105 per week (£5,460 per annum)
| Earnings | ITR | ENI | Combined | Average | Total Deduction |
|---|---|---|---|---|---|
| £0 to £5,435 | 0% | 0% | 0% | 0% | Nil |
| £5,436 to £41,435 | 20% | 11% | 31% | 0% - 26.93% | £0.01 to £11,159.69 |
| £41,436 + | 40% | 1% | 41% | - | - |
ITR = Income Tax Rate, ENI = Employee’s National Insurance, Combined = Combined Marginal Income Tax and Employees National Insurance, Average = Average Rate of Combined Income Tax and Employees National Insurance, Total Deduction = Total Income Tax and Employees National Insurance Paid
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