Contractors working inside IR35 often navigate complex payslips, especially when receiving payment through an Umbrella Payroll provider. This article breaks down the terms and deductions specifically for these contractors, ensuring a clear understanding of each component reflected on their payslip.
Invoiced Amount/Billed Amount
This will be the amount you have billed for the period. For example if you charge £500 a day and are billing for a typical 5 day working week, it would be £2,500 (5x £500). This will be the amount before any deductions.
The first deduction will be Umbrella Company Fee.
Umbrella Company Fee
This fee is charged by the Umbrella Company for processing your payroll, handling tax deductions, and providing additional services. It’s usually a fixed amount per timesheet or a percentage of your contract earnings. Expect this to be around £25 per week depending on the provider.
Employer Costs:
Next you will get deductions that would normally not be seen on an employee payslip as they are paid by the employer. However as there is no turnover apart from what you as the Contractor is billing, the deductions come from your billed amount.
The employer costs are Employer National Insurance and Apprenticeship Levy.
Employer National Insurance Contributions (NICs)
Unlike most employees, contractors inside IR35 shoulder both the employee’s and employer’s NICs, significantly affecting take-home pay. Employee NICs are deducted from your earnings, contributing to state benefits. Employer NICs are typically paid by employers, but under IR35, this responsibility often shifts to the contractor, increasing the deduction from your invoiced amount. You can learn more about NICs and rates on the UK Government’s National Insurance page.
Apprenticeship Levy
For contractors working through larger Umbrella Companies, the Apprenticeship Levy might be included as a deduction if the company’s annual pay bill exceeds £3 million. The Apprenticeship Levy guide provides more details.
Gross Pay
Your total earnings before employee deductions. For contractors inside IR35, this is usually the Billable amount minus Umbrella Payroll company fee and employer costs such as Employers National Insurance.
This is effectively what your Salary would be in the world of permanent employment.
Net Pay
The actual take-home pay after all deductions. It’s crucial for contractors to understand the various deductions that may affect this figure (explained below).
Tax Code
Indicates how much tax will be deducted from your earnings. Ensure your Umbrella Company has the correct tax code to avoid over or underpayment of taxes. More information can be found on HM Revenue & Customs (HMRC) website.
Income Tax Deductions
Income tax is calculated on your earnings, considering your tax code and total income level. Detailed information regarding income tax can be accessed through HMRC’s Income Tax section. Usually you will pay Income Tax at either 20%, 40% or 45% of your Gross Pay.
Employee National Insurance Contributions (NICs)
Employee NICs are deducted from your earnings, contributing to state benefits.
Pension Contributions
If opted in, a portion of your gross pay goes towards a pension scheme. Contractors should verify the terms with their Umbrella Company. Information on workplace pensions can be found on the Money and Pensions Service website.
You may be automatically enrolled into a pension through your Umbrella Payroll Provider. This usually happens around 3 months after you start contracting. Alternatively, many providers now offer a Salary Sacrifice pension scheme approach that can be more tax efficient.
Student Loan Repayment
If applicable, repayments are deducted based on your earnings level and plan type. For more details on how repayments are calculated, visit the Student Loan Repayment page.
Benefits in Kind
Any non-cash benefits provided through the Umbrella Company might be listed here and are subject to tax.
Additional Deductions
Any other deductions, such as holiday pay accruals or other specific deductions relevant to your Umbrella Company’s policies.
Conclusion
For contractors operating inside IR35 and receiving payslips from an Umbrella Company, understanding each deduction is crucial for financial planning and ensuring you’re being paid accurately. Notably, the burden of employer’s NICs and the Umbrella Company fee are significant distinctions from typical employee deductions.
Always verify the details on your payslip and consult with your Umbrella Company for any discrepancies or clarification needed. Your payslip is a key document reflecting your contractual work and financial health as a contractor within the IR35 framework. For any further details, always refer to the official UK government webpages linked throughout this article.