There is no getting away from it – tax in the UK is complicated. However, this guide aims to break down the deductions you can expect to see from your pay as a contractor and hopefully give you a fuller understanding of what’s going on with your money.
First, we will break down how tax works through an Umbrella Company – often the first destination for a contractor and certainly the easiest. Next, we will touch on how tax is handled through a Limited Company. Being paid through a Limited Company tends to be the most tax efficient way to be paid, although this depends on your personal circumstances – see our Umbrella vs. Limited guide to see which is best for you.
Tax through an Umbrella Company
Umbrella taxes are handled through PAYE – the UK’s pay-as-you-earn income tax system, used for permanent and salaried employees. There are also National Insurances to be paid. All figures are correct as of 2017-18.
Employer’s National Insurance: Before an employee can be paid, the employer – in this case the Umbrella Company – has to pay Employer’s NI. As of 2017-18, this is 13.8% of all income above £157 a week.
Employee’s National Insurance: Once money is paid to you, you pay 12% of all income over £157 a week, as National Insurance. This means that 25.8% of all income earned will be paid to HMRC for National Insurances.
Income Tax: Income Tax is based on annual thresholds. No tax is applied to income below £11,500. 20% tax is applied to the next £33,500 of income and 40% tax is applied to income above this. If you earn more than £150,000, 45% tax is applied.
As an employer, the Umbrella Company is also liable for additional taxes such as the Apprenticeship Levy, which all businesses must pay when making payment to an employee.