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Umbrella Company

Umbrella Company

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I am looking at a site advertising services as an umbrella company where the client will become an employee of lets call them XYZ. Looking at their calculation for take home pay they appear to take off employers NI as a direct cost reducing the amount of pay they are then applying tax to. Is this correct?

They appear to want a lot of money per week for processing this and I am wondering if we couldn't do it cheaper by setting up a ltd co and running a payroll. Am I missing something? There would only be a few entries. 

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By refs8
12th Jul 2013 12:44

Yes

I always thought Umbrella companies were supposed to save money but it does appear it is more about saving admin. I have been looking at these too and surprised with my own statement!

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By neileg
12th Jul 2013 12:54

Funding the Er's NI

If the umberella company didn't net down the Er's NI, where would they get the money to pay it?

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Replying to RG:
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By David Franks
12th Jul 2013 13:27

 My issue is that they are

 My issue is that they are treating the ers NI as though it is a taxable deduction. I.e. if the gross pay was £200 and the ers was £30 they are calculating the 20% tax on £170 not £200. This is obviously not the usual procedure so just wondering why its allowed for employees of umbrella companies but not for regular employees

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By neileg
12th Jul 2013 14:02

Not really

If your client 'earns' £200 from the ultimate customer then the umberella company has to fund the Er's NI from that and pay the balance to your client. So if the NI is £30 then your client's gross pay is £170 not £200 so it is correct to calculate the tax on £170.

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By Euan MacLennan
12th Jul 2013 14:47

Classic IR35 calculation

I am not sure about umbrella companies, but the classic IR35 calculation is to start with the fees earned from the client, deduct 5% to cover overheads and then deduct all specific personal expenses of the worker (travel, etc.) to arrive at the figure which covers Gross Pay + Er's NIC (or Net Pay + Total PAYE).

They may lay out the calculation in an odd way, but I can see why they deduct Er's NIC to arrive at Gross Pay and only calculate tax and Ee's NIC on the Gross Pay.

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By Kye Burchmore
12th Jul 2013 16:44

Umbrella's can be costly

It is correct and unless the individual is incurring a reasonable amount of expenses, the umbrella route will not be a great solution because of the employer's national insurance being paid out of the money that would otherwise be the individuals gross. Certainly worth exploring the limited company route as it may be more beneficial if they earn a decent amount, the only risk being if they are caught by IR35 although the enquiries into IR35 are few and far between at the moment. One other option to throw into the mix is for the individual to work on a self-employed basis via a contracting company although I am a little bias towards this route :-) 

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By ver1tate
12th Jul 2013 20:13

Umbrella company

Tried bringing this up with HMRC, but never got a sensible answer.

For example. Gross pay £500.00, tax free expenses£100.00. The UC deducts the £100 from the £500 making it £400, then their fee of £25, resulting in £375. Calculations are then made to deduct E/er NI, E/ee Ni and tax on the £375. Finally the £100 is added back on to the net total.

Calculate this for yourself. The contractor seems to end up with less money than he would get with no expenses.

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