Umbrella Companies​

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• Tax Deduction: The umbrella company operates PAYE (Pay As You Earn) for income tax and National Insurance. The company will calculate and deduct these before paying your salary.

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• PAYE Rates:

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• Income Tax: The tax is based on the same income tax bands as other employment. For the 2024/2025 tax year:

 

• Personal Allowance: £12,570 (no tax on income up to this amount).

 

• Basic Rate (20%): Income between £12,571 and £50,270.

 

• Higher Rate (40%): Income between £50,271 and £125,140.

 

• Additional Rate (45%): Income over £125,140.

 

• National Insurance:

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• Class 1: The umbrella company deducts National Insurance contributions (NICs) for you.

 

• Employee's NIC:

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• 12% on earnings between £12,570 and £50,270.

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• 2% on earnings above £50,270.

 

• Employer's NIC: The umbrella company pays 13.8% on earnings above £9,100 annually.

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• Benefits: The umbrella company simplifies tax filing and ensures compliance with HMRC, making it an ideal option for contractors who don’t want the hassle of managing their own business administration.

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• Expenses: Depending on the umbrella company, you may be able to claim certain business expenses, such as travel and equipment, but the rules can vary, and there are some restrictions.

 

Limited Company Contractors

 

• Corporation Tax: The company pays corporation tax on its profits, which is set at 25% (for profits over £250,000; a lower rate may apply for smaller profits).

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• Dividends: As a shareholder, you can pay yourself through dividends, which are taxed at the following rates:

 

• £1,000 Dividend Allowance (tax-free).

 

• Basic Rate (8.75%): For income within the basic tax band.

 

• Higher Rate (33.75%): For income within the higher tax band.

 

• Additional Rate (39.35%): For income over £125,140.

 

• Salary: You can also pay yourself a salary, subject to income tax and National Insurance. Many contractors keep their salary at or below the personal allowance to minimise tax, taking the rest as dividends.

 

• IR35: IR35 rules are essential for limited company contractors. If you are deemed to be working like an employee for one client, you may need to pay taxes like an employee (via PAYE) instead of benefiting from the tax advantages of a limited company.

 

 

Self-Employed Contractors (Sole Traders)

 

• Income Tax: As a self-employed contractor, you pay income tax on your profits based on the following bands for the 2024/2025 tax year:

 

• Personal Allowance: £12,570 (no tax on income up to this amount).

 

• Basic Rate (20%): Income between £12,571 and £50,270.

 

• Higher Rate (40%): Income between £50,271 and £125,140.

 

• Additional Rate (45%): Income over £125,140.

 

• National Insurance:

 

• Class 2: £3.45 per week if your profits exceed £6,725.

 

• Class 4: 9% on profits between £12,570 and £50,270; 2% on profits above £50,270.

 

• Self-Assessment: Self-employed contractors must file a Self-Assessment tax return by January 31st each year for the previous tax year (April 6th to April 5th).

 

• Expenses: You can claim a wide range of business expenses, including office costs, travel, professional fees, and training directly related to your work.