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How contractors pay tax through an umbrella company

Updated: Sep 18, 2023

Although every worker earning more than the personal allowance in the UK must pay tax, the way certain workers are taxed can differ. For example, as an umbrella company contractor you will pay tax differently to how you would pay tax as a limited company or self-employed contractor.


For that reason, before you decide that this is the best option for you, it's important that you understand how you will pay tax through an umbrella company, to ensure you're making an informed decision.


To help, Umbrella Search has put together this guide outlining everything you need to know about how contractors pay tax through an umbrella company.


What type of tax does a contractor pay through an umbrella company?


An umbrella company contractor becomes employed by their chosen provider, meaning you will pay tax like most employees in the UK do - through the pay-as-you-earn (PAYE) scheme.


This is one of the many benefits to working through an umbrella company, as they will process your salary through their payroll, deducting the correct levels of tax and National Insurance from your pay before it is deposited to you. A breakdown of your tax deductions will show up on your payslip, just as it would for any other permanent employee.

What tax is deducted from your salary through an umbrella company?


So what tax is deducted from your salary as an umbrella company contractor?


Income tax: just like any other employee or self-employed worker in the UK you are required to pay income tax on any earnings above the personal allowance threshold which currently stands at £12,570. You will be taxed at 20% on anything earned from the personal allowance threshold to £50,270. Between £50,271 - £125,140 you will be taxed at the 40% rate and anything over £125,140 is taxed at 45%. Please note that tax bands differ in Scotland.


Employees National Insurance: this will also be taken off your salary before it is paid to you. National Insurance bands differ depending on how much you earn - you can find the current rates here.


Employers National Insurance: As an employee of the umbrella company they are obliged to pay employers National Insurance. However, as the umbrella company does not benefit from the work you carry out as a contractor, some umbrella companies will pass this cost onto the contractor. If this is the case it can be worth taking this into account and absorbing this into your contractor fees.


The Apprenticeship Levy: this is a duty that was introduced in 2017 that some employers including umbrella companies must pay. It is charged at 0.5% and again, as the umbrella company does not benefit from the work you are doing they often pass this onto the contractor. You can find out more about the Apprenticeship Levy in this useful guide.


What is an umbrella company?

How does this differ for limited company contractors?


Self-employed contractors on the other hand will pay tax differently.


As they are not employees, they will pay tax through self-assessment. This means that they will first receive their fee from the client before any tax is taken off. They must declare to HMRC how much they were paid in the previous tax year, making sure they have set aside enough to cover the upcoming tax bill.


This is often far more complex and time-consuming than paying tax through the PAYE system and for this reason many contractors opt to work through an umbrella company due to ease of use.


Although an umbrella company charges the contractor a small fee, most self-employed contractors end up using the services of an accountant which usually works out being far greater than the umbrella company fee.


It is also worth noting that contractors that operate through their own limited companies will also be responsible for filing a Company Tax Return each year, and must pay corporation tax on any company profits which is yet another expense.


Find out more about limited companies for contractors in our handy guide.


Ready to find an umbrella company with the help of Umbrella Search?


Now that you understand how easy it is for a contractor to pay tax through an umbrella company, you may want to take the next steps to finding the perfect provider for you. If this is the case, Umbrella Search is here to help.


After all, working through a limited company can be complex, but with an umbrella company all your tax obligations will be taken care of for you. That means no more worrying about whether you are paying tax correctly and no need to store away part of your earnings to cover your upcoming tax bill.


At Umbrella Search we will work closely with you to find the umbrella company that suits your contracting needs. To see how we can help you simply get in touch with one of the team today.


Contact us to see how we can help you.

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