Whether you’re an experienced umbrella company employee or new to the industry and wanting to learn more, our step-by-step guide breaks down all the information you need. As the Government’s employment and tax legislation is continually changing, it’s worth bearing mind that rules regarding umbrella companies can and do change too. So, taking a moment to keep your knowledge up to date is a wise move.
What is an Umbrella Company?
Umbrella Companies are estimated to be used by 14% of the UK’s contractor population. They provide a vital service to umbrella company employees, contractors (or clients) and recruitment agencies.
The umbrella company directly employs agency workers who provide fixed-term or temporary work which is usually found by a recruitment company to contractors. This work is often on a short-term basis and umbrella employees usually work on multiple assignments each year.
So how do umbrella companies work?
The contractor (or client) engages the recruitment agency to find suitable workers for their requirements. The contractor will agree what’s often called the ‘Umbrella Rate’ for the assignment. The umbrella rate does not include any deductions and the umbrella company employee will not be paid this rate.
The recruitment agency finds work assignments for the umbrella company employee. They will provide the umbrella company employee with a Key Information Document for each assignment including:
- the minimum assignment rate paid to the umbrella company
- what the umbrella company will deduct
- your pay ensuring it is always above the national minimum wage
The umbrella company employee (or worker) is employed under a contract of employment. Whether you work on one assignment or multiple, you are continuously employed by the same umbrella company.
The umbrella company employs the worker, providing full employee benefits, managing their tax and NI deductions, and paying the worker for all work completed.
Why Do Umbrella Companies Exist?
Umbrella companies existed originally as a contracting method which allowed contractors to legally deduct expenses from the pay thereby reducing the tax they were required to pay. A change in legislation in 2016 ended this practice and at that stage it looked as though umbrella companies might cease to exist.
However, the umbrella company structure still provided a number of benefits for workers, agencies and contractors which remain today.
Umbrella company employees benefit from their employed status with statutory benefits including holiday pay, sick pay, maternity pay and pension auto-enrolment on top of being assured at least National Minimum Wage pay. Importantly workers also gain a continuous record of employment which can help with loan and mortgage applications.
Recruitment agencies benefit by reducing their administrative burden, freeing up their focus to work on finding placements and roles for their candidates. They also remove their employment liability as the umbrella company directly employs the worker.
Similarly, the end client or contractor benefits by reducing their administrative burden, freeing up their focus on running their business. The umbrella company approach also allows greater flexibility to manage their workforce, bringing in additional workers as needed.
What Deductions Should be Made?
One of the most mis-understood aspects of umbrella companies are the deductions which are made and shown on umbrella company employees remittances and payslips. To help explain this we’ve outlined some key facts below. If you have any questions regarding this, you can contact our experienced payroll team who will be happy to advise you.
Before we explain the specific deductions, it’s important to note that all tax and national insurance deductions are set and controlled by HMRC. Every payroll company is required to make these in accordance with the legislation at that time.
Part 1 – Your Umbrella Company Is Paid Your Assignment Rate
Your umbrella company will make several deductions to calculate your gross pay. These are shown on employee remittances. Deductions include:
- Umbrella company operating costs (sometimes called ‘margin’)
- Employer National Insurance contribution
- Employer workplace pension contribution
- Holiday pay
- Apprenticeship Levy (if applicable)
After these deductions are paid, the remaining pay amount is your gross pay.
Part 2 – Payslip deductions
The umbrella company will then make deductions from your gross pay to calculate your net pay which is the payment you will receive into your bank account?
- Income Tax
- Employee National Insurance contributions
- Employee workplace pension contribution
- Student loan repayments (if applicable)
- Other deductions that you have agreed to or are legally required to pay
With the exception of the umbrella company margin, all of the above deductions will be the exactly same at all compliant payroll companies. If your deductions are lower / higher than expected, this could indicate that you are part of a non-compliant scheme.