Contractor take home pay explained

When working as a contractor, you may decide to enlist the help of a contractor umbrella company to handle your finances and make sure you are paying the right taxes to HMRC.

A reliable contractor umbrella company will pay you through PAYE, deducting Income Tax, National Insurance Contributions (NIC’s) as well as their fees from your gross earnings, ensuring your take home pay is correct at all times.

Using a contractor umbrella company means you will receive your salary as a net income, taking the hassle out of managing your finances as a contractor.

The Umbrella Company will also issue you with a P45 when you are no longer using their services or a P60 at the end of the tax year.

Income tax explained

Income tax is a tax on an individual’s personal income. If you are employed, you will be liable to pay income tax.

To calculate how much tax liability you have for a specific year, you will need to calculate all of your taxable income. For most contractors, this could be income from employment, dividends, income from savings and investments and rental income.

This will then need to be applied to the personal allowance and income tax rate bands for the current tax year to calculate the contractor’s tax liability, this will then be deducted from the contractor’s gross earnings to calculate their net income.

Personal allowance: Contractors who earn under £100,000 per year can earn up to £9,440 without having to pay any tax, this is known as a personal allowance.  All subsequent tax is based on income in excess of the personal allowance.

Once a contractor is earning over £100,000 per year, their personal allowance will start to reduce.

Taxable income: This is a contractor’s total income minus their personal allowance. The taxable income is then taxed.

Income tax: The basic rate band for income tax is £32,010, therefore if a contractor is earning above £9,440 but below the higher rate threshold of £32,010, the contractor must pay income tax at a rate of 20%.

Higher rate of income tax: Contractors who earn over £32,010 per year but below £150,000 must pay a 40% rate of income tax.

Top rate of income tax: If you are a contractor earning over £150,000 a year, you must pay the top rate of income tax, this is 45%.

National Insurance Contributions explained

Contractors may be liable to pay National Insurance Contributions (NICs) when earning above a particular threshold.

NIC’s is only applied to income from employment or profits from self-employment, within a certain band.

If you earn below the band, you will be exempt from making NICs, if you earn above the band you will pay a reduced rate.

NICs are payable until a contractor meets retirement age. Most contractor make their NICs through a contractor umbrella company, they pay Class 1 National Insurance Contributions.
The Class 1 NICs rates for the 2013/14 tax year are:

Earnings NIC Rate
£7,748 – £41,444 per year  12%
£41,444 per year and above  2%

There are many elements to your pay when operating as a contractor, enlisting the help of a reliable contractor umbrella company will ensure your tax affairs are complaint with HMRC’s regulations and the pay you take home is correct.

If you are contracting or thinking about getting into contracting and want your contractor take home pay explained or you’re looking for a reliable contractor umbrella company, contact Futurelink Group on +44 (0)1923 277 900.

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William Cadden, Self-Employed Contractor

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Ronaldo, Umbrella PAYE contractor

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Michelle Hughes, WS Contractors Ltd

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