Your Umbrella Company Does Not Decide How Much You Are Deducted – HMRC Does

Time and time again we hear “why is my umbrella taking so much of my money” or “my pay is too low through this umbrella, I want to find out what I can get through another one”. Sadly this is a misunderstanding, and tax avoidance schemes are to blame. They pretend to be umbrella companies and fool temporary workers into thinking they can get more money than they should be.

You don’t get to decide how much is deducted from the gross amount – and neither does the umbrella company. In actual fact, this is set by HMRC and the rates for tax and NI are dictated by them. The one and only thing umbrellas – compliant ones anyway – have power over is their fee, a.k.a. the ‘margin’ charged for the service.

So when you compare umbrella company quotes you should not ask why some give you such a low take home, you should ask why that one other umbrella has offered you more than the others. Proper umbrellas all operate under the same PAYE model, so why should one umbrella magically be able to give you a higher take home pay? The answer is tax avoidance, and the consequences are tax bills and penalties.

The 4 Deductions

There are 4 deductions you will always, always see through a compliant umbrella company.

Company cost/umbrella margin

£10-£30+ per week, depending on the company. Check out our top 10 umbrella companies list to get an idea of service costs.

Employment costs

  • Employers NI: 13.8% fixed, cannot change.
  • Apprenticeship Levy: 0.5% – all large employers need to deduct this. If the umbrella is small they may not, but you might not want to use a tiny umbrella company as the staff could lack experience.

Income tax

20% at the basic rate, 40% at the higher rate. If your salary for the year is projected to go over £100,000, the income abatement may also apply.

Employee NI

12% – also fixed by HMRC and cannot be removed unless you are of State Pension age.

Because HMRC makes the rules, you can’t really get a ‘quote’ or an ‘offer’ from an umbrella company – it just doesn’t work that way. You can only get an illustration based on each umbrella company’s margin. If all compliant umbrellas were free, you’d take home exactly the same regardless of who you chose.

The Assignment Rate

We get a lot of people coming to us angry about Employers NI and the Apprenticeship Levy being deducted from their salary. This is another misconception. To be clear, an umbrella rate advertised by a recruitment agency is not the salary. This is the assignment rate (salary + employment costs). Agencies requiring workers to use an umbrella company need to uplift the rate by about 14.3% to cover the employment costs in advance. By the time you see the rate, whether it’s daily or hourly, this should already be done.

If you were to go on the agency’s books, you’d get a lower rate because the agency pays the employment costs. However, umbrellas cannot pay the costs and don’t benefit from your work, so the responsibility is on the agency to uplift your rate.

Umbrella companies have no say whatsoever on what your rate is, or whether employment costs are already included in this. If you need clarification, check with your agency or end-client first before getting comparisons for umbrella services.

Click here to see our top 10 umbrella companies!

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