When you work through an umbrella company in the UK, you are treated as an employee for tax purposes. This means that you are liable to pay income tax and National Insurance contributions.
Income tax
Income tax is calculated on your taxable income, which is your total gross earnings minus your personal allowance and any other tax-free allowances. The personal allowance for the 2023/24 tax year is £12,570. This means that you will not have to pay any income tax on the first £12,570 of your earnings. Any earnings above this amount will be taxed at the following rates:
- 20% on earnings between £12,571 and £50,270
- 40% on earnings between £50,271 and £125,140
- 45% on earnings above £125,140
National Insurance contributions
National Insurance contributions are paid by both employers and employees.
As an umbrella company contractor, you are responsible for paying employers as well as employees NICs. At first, this might seem strange, but you can find out more in our guide: why am I paying employers NICs as an umbrella contractor?
Your assignment rate is inflated to include this employer’s NIC liability of 13.8% on income above £9,100 per year.
You only pay employee NICs on your gross pay (i.e. after the employer’s NICs and other employment costs are paid).
The rate of employee National Insurance contributions was 12% between April 6th 2023 and Jan 5th 2024. The rate was cut to 10% on earning between Jan 6th and April 5th 2024.
This is paid on earnings between £12,570 and £50,270. You pay 2% on income above £50,270.
Your umbrella company will deduct your NI and income tax liabilities automatically and pay HMRC on your behalf.
Other deductions
In addition to income tax and National Insurance contributions, your umbrella company may also deduct other amounts from your pay, such as:
- Student loan repayments
- Pension contributions
- Professional memberships
- Health insurance
- Travel expenses
It is important to check with your umbrella company to see what deductions they will be making from your pay. Read our guide to umbrella company expenses for more details.
How to calculate your take-home pay
To calculate your take-home pay, you can use the following formulas:
1. Assignment rate – employment costs (Employers NICs, Apprenticeship Levy, Employer Pension Contributions, etc.) = Gross pay
2. Gross pay – Income tax – Employees NICs – other personal deductions = your net take-home pay
Don’t forget – your assignment rate includes employers’ NICs and other employment costs. These are deducted before your gross pay is calculated.
Tax tips for umbrella company employees
Here are a few tax tips for umbrella company employees:
- Make sure you understand your tax code. Your tax code is a number that tells your employer how much tax to deduct from your pay. You can find your tax code on your P45 or by contacting HMRC.
- Contribute to a pension. A pension is a tax-efficient way to save for retirement. You can contribute up to £60,000 per year to a pension and receive tax relief on your contributions. All employers must automatically enrol you into a workplace pension scheme, unless you opt out.
- Gift aid your donations. If you make a donation to a charity, you can increase the value of your donation by 20% by claiming gift aid. To claim gift aid, your charity must be registered with HMRC.
- Check your payslip regularly. Make sure that your umbrella company is deducting the correct amount of tax and National Insurance contributions from your pay. If you have any questions, contact your umbrella company.
By following these tips, you can ensure that you are paying the correct amount of tax and National Insurance contributions.
