the umbrella scheme for PAYE

the umbrella scheme for PAYE

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My Client operates mechanical equipment and has had several employments throughout the UK on a number of construction sites during the 2014 tax year through an agency that operates "the umbrella scheme" when producing his payslip.

The payslip shows the hours worked and the contracted rate of pay to give a gross pay for the period.

This is then ignored.  Instead, there is a calculation to arrive at the net pay where the same hours worked are multiplied by the national minimum wage to give a new, much lower, gross pay which is used to calculate PAYE and NIC.

The difference between the new net pay and the real gross pay is reconciled by a whole range of things including holiday pay, Employer's NIC and travel and subsistence expenses.

It seems that bona fide travel and subsistence expenses - which employers will normally reimburse quite separately - are used here to reduce taxable income.

At the end of the year, a letter has been sent to the employee to say that as the PAYE and NIC deductions have not bee sufficient to fully eliminate the employee's allowable expense, a claim should be made on an SA tax return for the 327.92 miles not recovered.

I am completely at a loss to understand what this umbrella company is up to.

I shall be eternally grateful if there is anybody able to clarify how this scheme works and how it sits with normal PAYE practice.

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By stratty
01st Aug 2014 17:40

Umbrella PAYE v Normal PAYE

Although the mechanics of PAYE are fundamentally the same in both operations you need to consider that Umbrella PAYE employees are treated as contractors and that the overarching contract of employment enables them to claim expenses.  These are deducted from the gross invoice value and give rise to a lower tax and national insurance charge as a result.

If you want specifics on the operation of Umbrella PAYE feel free to PM me.

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