Just started contracting, tax question..

marcus2704

Ive just moved into IT contracting and have a couple of basic questions with regards to tax and NI, forgive my ignorance but its my first real foray into this type of wage..

I understand that I have to pay two amounts of NI and tax, and I am currently paid weekly and am using an Umbrella company, ParasolIT.

Basically, for my first weeks pay I got the following -

Gross £637.50

Deductions were -

Employers NI - £59.07
NI - £50.76
Tax (code 503L) - £161.68
Parasol admin fee (20)
Net pay £346.02

That total comes to £271.51 worth of deductions, which must be around 40% of my overall pay. From what I am aware 503L is an emergency code, but looking at my P45 I was on that already with my last permanent employer.

Looking at those figures, the deductions seem awfully high to me, in fact despite this contract paying around £6p/h more than my permanent job, I would still be worse off on those figures.

I claimed subsistance, mileage and train travel expenses totalling £252, do these figures look right to you guys as to say I was gutted when I realised I was only getting £346 from a gross payment of £637 was an understatement..!

seminole_2

Well you need to get the tax code sorted out. Were you completing self assessment returns previously?

marcus2704

Im using ParasolIT at the moment, so I guess from what you are saying its up to my expenses/subsistance claims to boost my wagepacket. I claim 15-00 per day subsistance, some mileage and train fares, so I guess I will see that back as a reduction in tax/NI over the coming weeks?

marcus2704

I should of made it clear that the net pay above was paid out prior to my submitting my expense claims, which I guess could make the difference.

WHA

May I suggest you look at the contractor uk website forums on https://www.contractoruk.com which is the specialist site for IT contractors amd where you will get responses from other IT contractors and specialist accountants.

marcus2704

What happened was I recieved a severance payment when I left my last job, I guess the amount affected my gross pay to-date as 9 weeks into the tax year and my gross payment figure stands at just under 7k.

Based on IR calculations gross divide by 9 (tax weeks so far), times by 52 gives a figure just over 40k gross.

I doubt Id be earning that high (nice thought), so I guess either over time Ill get the tax back now or at the end of the tax year.

Its a bit annoying though as that severance payment has increased my gross pay figure artificially, and I have to pay 40% tax now because of it, I guess until some time goes by and the tax calculations settle back to normal again.

cash99

The hourly rate you are getting paid actually includes the NI usually paid by the employer. To find your actual hourly rate you need to divide by 1.128. ( This is all related to IR35, and the way umbrella companies operate)

Based on the figures you gave your rate is around £17 per hour including the employers NI, or £15 per hour excluding the employers NI.

503L is the standard code, unless it has wk1 or mth1 after it, only then is it an emergency code.

Based on the £7k earnings at week 9 you should already be getting back some of the higher rate tax you have paid and if your earnings remain the same, it will all be repaid within 5/6 weeks.

Any expenses you claim will save you tax at 22% and nic at 10% on the amount of the claim, boosting your take home.

Andy_Davies

cash99 wrote:

Any expenses you claim will save you tax at 22% and nic at 10% on the amount of the claim, boosting your take home.

They don't really boost your take home pay, all it means is your expenses get re-imbursed out of gross income - you've had to pay the money out first anyway.

cash99

Andy_Davies wrote:

They don't really boost your take home pay, all it means is your expenses get re-imbursed out of gross income - you've had to pay the money out first anyway.

An employee earns £150 gross and takes home £100, out of which he pays travel and subsistence of £20 leaving £80.

A Contractor under an umbrella company earns £150 gross out of which he pays travel and subsistence of £20 leaving £130 gross and a take home of £87.

Which one takes home more?

Umbrella companies also have dispensations on expenses, which include flat rate amounts for meals etc. It means you can claim say £6 for lunch each day, without providing receipts. If you spend less then you save money.

Andy_Davies

cash99 wrote:

An employee earns £150 gross and takes home £100, out of which he pays travel and subsistence of £20 leaving £80.

A Contractor under an umbrella company earns £150 gross out of which he pays travel and subsistence of £20 leaving £130 gross and a take home of £87.

Which one takes home more?

Umbrella companies also have dispensations on expenses, which include flat rate amounts for meals etc. It means you can claim say £6 for lunch each day, without providing receipts. If you spend less then you save money.

I think you've forgotten the employers NI in your umbrella company calculations...