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How a Tax Calculator Can Mislead Contractors

As an umbrella company employee, if you plug your contract rate into an online PAYE calculator it will overestimate your take home pay. This is because online calculators are designed for conventional employees, and the contract rate is the amount paid to your umbrella company.

Before you use an online tax calculator it's important to know how your pay is calculated and what it means when an agency quotes a contract rate.   

Why use an online tax calculator?

Online tax calculators like Listen to Taxman, or this one at Money Saving Expert provide a quick and easy way to calculate take-home pay from a gross figure. This can be extremely useful, particularly if you’re looking for work and negotiating pay rates, which is a normal part of the contracting life.

However, most online tax calculators are designed for traditional employees rather than contractors, and while they’re generally accurate if your situation fits, they can cause confusion if it doesn’t.

Why a tax calculator might give you the wrong figure

The most common reason why umbrella employees get the wrong figure from an online tax calculator, is that they start with the wrong rate.

This confusion is more common than we’d like, because the contract rate is often quoted as the contractor’s pay rate, which is not correct.

The difference between the contract rate and your gross pay

The contract rate is the rate paid by the agency to your umbrella employer. The umbrella’s costs, including the costs of employing you, have to come out of this rate. The contract rate should include an uplift to cover these costs, which is why it will be higher than the PAYE rate if one was offered by the agency.

Your gross pay is the amount the umbrella pay you, once their costs have been deducted. Tax and national insurance will be deducted from this figure.

Most compliant umbrella companies will be happy to give you a detailed pay illustration before you join them, so you know what you’ll be paid. This illustration is likely to be more accurate than any calculation you find online.  

What a tax calculator can be useful for

When offering you a new contract, many agencies will give you a choice of two rates; the contract rate that we mentioned above, and a lower PAYE rate.

The contract rate is the rate the agency will pay an umbrella company. The PAYE rate is what the agency would pay you through their own PAYE system, and it’s lower because the agency will incur the employment costs.

As the PAYE rate is the same as your gross pay, an online tax calculator should give you a reasonably accurate idea of what you’ll take home through agency PAYE.

This is usually roughly the same as you’ll be paid if you opt for umbrella employment, but it’s still worth asking your prospective umbrella for a detailed illustration. When comparing the two, remember that umbrella employment gets you additional rights, protections and benefits that you don’t get through agency PAYE.

How Orange Genie can help

If you’re using an online tax calculator, it’s a safe guess that you have a pay figure and you want to know how it will translate to money in your bank account. The best way for a contractor to answer that question is to speak to an expert who can complete a pay illustration.

Orange Genie’s friendly team will be happy to do this for you. They’ll also answer any questions you might have about contracting, and make sure you’re using the best working arrangement for your circumstances, all in just a few minutes.

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