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Why do umbrella company calculations vary between providers?

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Why do umbrella company calculations vary between providers?

Demand for umbrella companies is rising as a result of changes to IR35 legislation. Therefore, it’s no surprise that contractors inside IR35 seek umbrella company calculations from multiple providers – to compare their potential pay retention. Perhaps to peoples’ surprise, umbrella companies are quoting contractors different amounts based on the same information, which can be misleading. Therefore, we’ve set out to answer: why do umbrella company calculations vary between providers?

The first thing to remember is that umbrella companies process their employees’ payroll in the same way – proving they’re a compliant provider (PAYE). PAYE (Pay As You Earn) is an HMRC tax system that ensures employer’s make the correct tax and National Insurance deductions to their employee’s gross salary before sending them their net pay. Therefore, the only thing that should affect a contractor’s take home pay is the umbrella company’s margin. For example, if an umbrella has a £15 margin, a contractor should expect to retain a few extra quid than an umbrella with a £35 margin.

Some umbrella companies will be sneaky and deliberately mislead contractors. Adding expenses in umbrella calculations is one unethical tactic that umbrellas use. Since the introduction of supervision, direction and control (SDC) legislation in 2016, it’s almost impossible for contractors to claim expenses through an umbrella. Therefore, any umbrella that adds expenses in their umbrella company calculations are doing this for two reasons, and both are naughty. Reason one – they allow their employees to claim expenses, which is questionable and should raise alarms. Or, reason two – they have added expenses deliberately to trick contractors into thinking they’ll retain more of their earnings than they actually will in reality. 

Disappointingly, a small minority of umbrella companies are known to be slightly relaxed when providing umbrella company calculation. They may not take the contractors circumstances entirely into consideration and may not quote for the right number of days in a month or weeks in a year. For example, an umbrella could base a take home pay calculation on the contractor working every week in the year. Sure, it’s possible, but in reality, surely the contractor will take time off – maybe for a holiday, for example? 

Tax codes are another thing that unscrupulous umbrella companies may tweak to generate higher take home pay. For example, some will use a tax code that increases the contractor’s personal allowance. 

And finally, let’s not forget the abatement. Higher earners will start to lose their personal allowance when their annual income begins to exceed £100,000. For every £2 earned over £100,000, the employee loses £1 of their personal allowance. The best umbrella companies will ensure this is included in their calculations to ensure they’re accurate. However, sneaky providers will “forget” to include this in their umbrella company calculations, so they appear inflated.

If you’re considering using an umbrella company for your payroll, we suggest you make it clear that you want an accurate and tailored calculation. Make sure you understand how the figures have been calculated, and don’t be afraid to ask questions and challenge the Sales Consultant on the other end of the phone. Choosing a compliant umbrella company should always be your priority. 

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