Information for first time Contractors
What is Employers NI and why do I have to pay it?
When you are working through an Umbrella Company or your own Ltd Company the agency will pay you a Ltd Rate rather than a PAYE rate. What is the difference, I hear you ask. Well the Ltd rate is made up of the PAYE rate, plus an amount equivalent to your entitlement under the Working Time Directive to holiday pay, plus Employers NI.
There are 2 different type of National Insurance that have to be paid on salaries. Firstly, the normal Employees National Insurance, which you will be used to paying in a permanent job. On top of that, the employer has to pay another chunk of National Insurance.
If you were to be paid by the agency directly, they would pay you the PAYE rate and then they would have to pay the Employers NI directly to the tax man. If you opt to go through an Umbrella Company, the Agency will generally pass the costs that they would have had onto you by adding that amount into the Ltd Rate. You are not out of pocket as you would have been on the PAYE rate if you were being paid by the agency. One of the things that the Umbrella Company will do for you, if they are a PAYE Umbrella Company like Simplify, is to ensure that the correct amounts are deducted and paid to the tax man.
Some contractors ask us why they should pay this part when they are an Employee of Simplify under an over-arching contract, but the money would have been paid by the agency to the tax man if you were paid directly by them, all they are doing is passing it to the Umbrella Company to pay instead by adding it into your rate.
It is worth double checking with your agency that the rate they are proposing to pay you includes Employers NI and an amount to cover your holidays, as if they are going to pay you the same rate when you work via an Umbrella Company as they would if you went PAYE through them, then you will be out of pocket.
Do I get paid for holidays?
As a contractor you only invoice the agency or end client for the hours you actually work. This means that when you take holiday no timesheet is submitted for those days, and no payment is made. However, when the agency gives you a Ltd Rate it includes 2 things on top of the PAYE rate. Those 2 things are an amount on top of the rate that is equivalent to you taking the statutory amount of holidays and Employers NI (see No 1). Because the rate that you have been getting includes this amount to cover holiday, when you take holidays the agency will have already paid you for those holidays in the payments made so far.
As your Umbrella Company we have 2 options available for how we handle the extra in your Ltd Rate to cover holidays.
Usually we loan the amount that your agency have already paid to you, and then redeem that loan when you are actually away – ie we don’t pay you when you are away as you have already had the holiday part of your pay. However, if you would like us to keep the holiday part back for when you actually do take your holidays, we can definitely do that. Please speak to your Account Manager about setting up a Holiday Fund.
When do I get paid?
We pay you the same day that we receive cleared funds from the agency or end client. So long as the money arrives in our account by 3pm on a working day, it will be paid to you the same day (subject to your bank being in the UK and accepting Faster Payments)
What is the Ltd Rate?
The Ltd Rate is the rate that you would have if you were a permanent employee plus an amount to cover your entitlement to holidays under the Working Time Directive, plus an amount to cover the Employers NI.
PAYE Rate + Holidays + Employers NI = Ltd Rate
Some agencies quote you both the PAYE Rate and the Ltd Rate when asking you if you wish to be paid directly through them or via an Umbrella Company. Although everyone assumes that as the Ltd Rate is higher, they will come out with more this is actually not true. If the agency are operating the Ltd Rate correctly, and are passing those 2 costs that they would have had on to you on top of the PAYE rate, then you would take home the same over the course of a year less the Umbrella Companies margin. (This is because the Employer’s NI will be taken from the payment to pay to HMRC and when you are on holiday you won’t be invoicing for the time).
The financial benefit of using an Umbrella Company is not in getting a Ltd Rate but in offsetting your expenses. If you don’t have expenses to offset then there are other benefits to using an Umbrella Company.
Am I always better off through an Umbrella Company?
No, unfortunately not everyone is better off via an Umbrella Company, so it is important that you deal with an honest company that will advise you if you will benefit from their service, like Simplify.
If you have less than approx £40 of expenses per week, then you won’t offset enough in tax and NI to recover our margin. This calculation is proportionate to the amount of the Umbrella Company’s margin, so the higher their margin the more you need to have in expenses to offset before you start to see the financial benefit.
You may have other reasons for using an Umbrella Company besides being able to offset expenses, such as not wanting the hassle of running your own Ltd Company. The other benefits of using an Umbrella Company are explained here.
Can I offset expenses and is there a limit to how much I can offset?
You can offset expenses if they are wholly, necessarily and exclusively incurred in the performance of your contract and are within the guidelines that HMRC set. Our Expenses Policy details the main items that can be offset.
You can offset expenses so long as the place of work is a temporary one, this means that you will be there for less than 2 years. At the point where you either have, or know that you will be there, for more than 2 years you are no longer able to offset them.
There is a limit to how much expenses we are able to process in any period for you, as the HMRC dictate that we must pay you at least National Minimum Wage. This means that we will process as much as we can up to that point and if there are any expenses left over, we will carry them forward automatically to the next payment.
Some Umbrella Companies show their margin as a net figure, what does that mean?
In the same way that your expenses can be offset, the margin that you pay us is a legitimate expense. Therefore, this will be offset against tax and NI too.
This means that the net cost of using Simplify is £12.20 per week or £43.36 per month if you are a basic rate taxpayer, or £7.70 per week or £27.36 per month if you are a higher rate taxpayer.
So, why do we not advertise it like that as some other Umbrella Companies do? Well, it is all about our commitment to honesty. The amount of our margin that will be shown on your payslip is either £22.50 per week or £80 per month, and if we had told you that you would only pay us £7.70 per week or £27.36 per month, we don’t think you would be very happy!
Do I need to do a Self-Assessment at the end of the year?
If your Umbrella Company is a PAYE Umbrella company, like Simplify, then you will be an employee of the Umbrella Company under an Over-Arching Contract of Employment. This means that your income will have been taxed throughout the year, as income from employment, according to the tax code we have for you.
If you have no other sources of income then there would be no need to complete a self-assessment, although if you have income from a pension, savings, property, shares etc, or you have another job in the tax year, or you are Director of a company, then we would recommend that you get advice from HMRC as to whether they expect you to complete a Self-Assessment.
If you leave part way through the year, we will issue you with a P45, or if you are still using Simplify at the end of the tax year, you will receive a P60 showing your income, tax and NI for the year.
How do I stand with IR35?
IR35 is a very contentious issue at the moment, and new guidance issued in April 2012 is tightening up the test to determine whether your employment status is employed or self-employed. The good thing about using a PAYE Umbrella Company is that you are saying that you are an employee of the Umbrella Company, paying tax and NI at an employed person’s rate, and therefore IR35 is not an issue to you.