The government has released some guidance online designed to help contractors, freelancers and agency workers who may require the services of an umbrella company. ‘Working through an umbrella company’ is a short piece of text (estimate 5-minute read) that will help cover the basics of umbrella payroll and provides you with information to ensure you choose a compliant provider. Keep reading, and we’ll summarise the guidance for you, but we recommend you read the official version too (linked below).
Read the official government guidance
The official government guidance called ‘Working through an umbrella company’ is available here.
When you join an umbrella company, you become an employee of theirs, and the umbrella is your employer. The umbrella company will process your payroll, but you conduct work for your employment agency’s client (or direct with a client if there is no agency within the supply chain). Umbrella companies operate PAYE – Pay As You Earn.
How an umbrella company pays you
Your end client will pay your agency, and the agency will then pass this on to the umbrella company. Agencies will deduct a fee for placing you at the client, and the rest is transferred. This is often referred to as the “assignment rate”. The government acknowledge that:
“The rate paid to the umbrella company by the agency will need to cover the costs of the employer National Insurance contributions. The umbrella company will use this money to pay employer contributions and not deduct the contributions from your gross pay.”
The deductions that an umbrella will make will include PAYE (income tax and Employee National Insurance Contributions) and the employment costs (Employer’s National Insurance Contributions and the Apprenticeship Levy). Temporary workers should receive an uplift in their rate to cover these deductions.
What you will be paid by an umbrella company
Usually, when an umbrella pays you, this amount is referred to as the “contract rate”. It consists of an hourly rate at the National Minimum Wage (NMW), and the rest as a taxable “bonus” or “additional pay”. This is considered your gross pay before any deductions have been made. Be warned – if you come across any payment that the umbrella company describes as “non-taxable”, they may be a tax avoidance scheme.
Your gross pay will be subjected to PAYE. You may also be deducted additional amounts to cover student loan repayments and pension contributions.
If you believe an umbrella is wrongly processing your payroll, the government recommend you contact the following:
We recommend you contact the FCSA and Professional Passport too – if the umbrella in question has one of these accreditations. We’ve written a blog that may be handy: How to report a non-compliant umbrella company.
Key Information Documents
Before you start working and being paid through an umbrella company, you should have been issued with a Key Information Document (KID). This is an official document that an umbrella provides that’ll explain your pay and the deductions that will be made. Key Information Documents should give you an accurate representation of your take-home pay working through that umbrella.
This document will give you a breakdown of how the umbrella has processed the assignment rate received and how they’ve deducted their costs (Employer’s National Insurance Contributions, for example). The government guidance state that “these amounts should be deducted from the umbrella company’s assignment rate, not your contract rate.”
Umbrella company payslips
When you use an umbrella company for your payroll, you’ll receive a payslip – very similar to somebody in permanent employment. Umbrella payslips should show you your gross pay and highlight all the deductions that have been made to leave you with your net salary. More information is available on the government website regarding understanding your pay.
We’ve written a blog that may be helpful, entitled: What deductions appear on umbrella company payslips?
Interestingly, the guidance makes it clear that “most umbrella companies are compliant with the tax rules”. However, it mentions that some are tax avoidance schemes.
Tax avoidance schemes are designed to help workers pay below the expected amount of tax and National Insurance Contributions by taking advantage of loopholes in UK tax law. While tax avoidance may technically be legal at the time, HMRC is retrospectively punishing those who engage with such schemes. The penalties can be severe.
If you believe you’ve engaged with a tax avoidance scheme, HMRC urges you to get in contact with them to settle your tax affairs.
Reporting non-compliant umbrella companies
You can report non-compliant umbrella companies to HMRC. More information is available here.
Top 10 umbrella companies
If you’re looking for an umbrella company, we’ve put together a list of top 10 umbrella companies that we recommend. They’re all accredited by either the FCSA or Professional Passport. Plus, some of them have amazing offers at the moment.