What is PAYE?
PAYE simply stands for Pay As You Earn. It refers to a system of paying income tax and national insurance contributions. In this method, your taxes are deducted automatically from your wages or occupational pension before paying you your wages or pension. When referring to wages, these include money you earn from working, sick pay, maternity or paternity leave, and adoption pay.
All UK umbrella companies operate under the same rules and are obliged to pay contractors under the PAYE rules. There are some companies that market themselves aggressively, saying they can increase your take-home pay considerably – sadly, this is not the case unless they are working in a non-compliant manner. If you work under an umbrella company, you will pay the same rates of tax and National insurance as everyone else.
How does PAYE work?
There are three parties involved. You, your employer/pension provider, and HM Revenue and Customs (HMRC). They each have their role. Initially, HMRC will calculate a tax code for you, indicating the percentage of wages that should go towards your taxes.
They will send a PAYE coding notice showing you how they calculated your tax codes. If you don’t receive this, you can always ask them. Your employers then use your tax code to work out how much tax to take off your payslip.
Your National Insurance contributions are deducted from your gross pay; this is calculated as a percentage of your total earnings and is the same for everyone.
Income Tax is then calculated on your taxable pay. Everybody has a tax code which will outline how much tax-free earnings they have in a given tax year. For instance 1100L means you can earn £11,000 before you pay tax, and this is expressed as a weekly or monthly taxfree allowance.
The PAYE system deducts tax from wages only. If you make more money from elsewhere, say sole trading ventures, you will have to account for this money earned using the self-assessment system. This involves filling in yearly tax returns documenting your earnings and paying the necessary amount of tax. This applies to earnings of over £1,000 outside of your payroll.
Most limited company contractors don’t have large salaries via payrolls. Instead, the bulk of their income is often a result of dividends. Tax due on dividends needs to be paid via self-assessment only before the end of the tax year.
Tax deductions made on behalf of employees need to be paid to HMRC monthly. This is as long as the combined amount of income tax and national insurance liability of all employees averages £1,500 or more. If the average is less than this, you are allowed to pay HMRC on a quarterly basis. Payments need to be made within one day of the end of the tax month. This means payments are due on the 19th of the month, or the 22nd if you are paying electronically.
Before April 2016, most contractors could offset business expenses to reduce their tax bill, however the legislation introduced on 6th April 2016 changed things considerably and meant that any contractor who is under the Direction, Supervision and Control (SDC) of their client would no longer be allowed to claim tax relief on their travel and subsistence expenses.
If you are outside of SDC and can prove it, then you may be able to receive tax relief on your Travel and Subsistence expenses at the end of the tax year via your tax return.
One Click Umbrella will be happy to log your expenses and store copies of your receipts to help you complete your return.
We can even complete the return for you for a small fee (currently £125 plus VAT).
Cost to you
We don’t want to confuse you with percentages, we don’t want to take more of YOUR earnings off you because you earn more. Our margins are simple and will remain the same whatever happens. We only retain what we need to cover the work we do – no more, no less!
If you are in need of an umbrella company solution for your business, look no further. One Click Group are here to guide you through the process and relieve you from the stress of doing taxes. Get in touch today on 0345 557 1287.