Net Salary Tax Codes and Net Pay

As a contractor working through an umbrella company, you will be paid a net salary.

It is up to your umbrella company service to do all the PAYE calculations for your tax & National Insurance Contributions (NIC). You don't have to worry about dealing with HMRC either, the umbrella company does all that, too!

Your umbrella company is responsible for doing all your administration, paperwork & handling all the complex form-filling. If you are new to contracting, you may find our useful introduction to an umbrella company guide quite helpful.

If you think your net salary is wrong, and your umbrella company haven't explained the calculations clearly enough, you can ask one of Contractor Supermarket's experts.

Gross Pay to Net Pay Example

Say your monthly timesheet value is £4,000 (your rate x hours/days), you'll actually end up with around £2,820 net in your bank account. 

Income: £4,000

Expenses: £500

Deductions: £1,129

Net Pay £2,820

Here's a breakdown of where your money is going:

Employee's NIC: £296

Income Tax: £490

Umbrella Company Fee: £50

Surcharge (Employer's NIC) £342

What is a tax code?

A tax code consists of several numbers and a letter, for example: 117L or K497.

If your tax code is a number followed by a letter

If you multiply the number in your tax code by ten, you will get the total amount of income you can earn in a year before paying tax.

The number reflects changes to allowances.

Common tax code letters

L = Basic Personal Allowance - 747L for the 2011-12 tax year. Also used for 'emergency' tax codes.
P = 65 to 74 and eligible for the full Personal Allowance.
Y = 75 or over and eligible for the full Personal Allowance.
T = Other items: eg the income-related reduction to the Personal Allowance. '0T' means allowances have been used up.
K = When your total allowances are less than your total 'deductions'.

If your tax code has two letters (or the letter 'D') but no number

Two or more income streams. Allowances applied to the tax code & income from your main job.

BR = Income taxed at the basic rate - currently 20%
D0 = Income taxed at the higher rate of tax - currently 40%
D1 = Income taxed at the additional rate of tax - currently 50%
NT = No tax

Reader Questions:

• Change in Net Pay from my Umbrella Company
• Rolledup Holiday Pay