Understanding umbrella company take home pay | A contractors guide

Understanding umbrella company take home pay

One of the most frequently asked questions by contractors and freelancers before they register with an umbrella company is how much they will get paid? We thought we’d answer this question in a simple and straightforward way so you can easily understand the umbrella company take home pay.

The margin

Every umbrella company will charge a weekly or monthly fee (also referred to as a margin) for you to use their service, and this will cover the administrative costs of running your payroll. The margin will usually range from between £15-25 per week and is the only revenue a compliant umbrella company will make.

Employment costs

You’ll notice on your payslip that employment costs (Employers National Insurance Contributions and the Apprenticeship Levy) have been deducted from your pay. This happens because even though you are completing work for your end client, you are employed by the umbrella company, and all employers must pay these costs. But don’t panic, a compliant umbrella company will never keep this money for themselves, instead, it’s sent to HMRC.

Why are employment costs taken out of my pay? The short answer is they’re not. Each role you take will have an assignment rate of pay, which should include an uplift to account for these costs if you are working through an umbrella company.

Holiday pay

Holiday pay is another area that causes a lot of confusion. Although it’s technically not a deduction, we wanted to include it anyway and explain how it affects your umbrella company take home pay.

Umbrella companies will usually work out your holiday pay as 12.07% of your gross taxable salary, and you can choose to have it paid in advance or accrued.

If you have your holiday pay paid in advance, your entitlement is paid alongside your regular earnings each week/month. If you opt to have it accrued, it is retained in a holiday pot until you request to have it paid to you.

Basically, make sure your holiday allowance (Holiday Pay) is included in your assignment rate, as umbrellas will simply reallocate your own funds and show Holiday Pay on your payslip (legal requirement).

Pension contributions

It is a legal requirement for umbrella companies to enrol you into a workplace pension scheme after 12 weeks of continuous employment – you can opt-out if you wish.

However, if you would like to continue with the workplace pension scheme, you will notice on your payslip that both the 5% employee contribution and 3% employer’s contribution are deducted. Umbrella employees are required to make both these deductions themselves – from the assignment rate.

You should always consider how the additional deductions will affect your umbrella company take home pay and if an uplift has been included in your assignment rate to account for the additional deductions.

Income Tax and Employees National Insurance Contributions

When you work through an umbrella company, you become their employee and will be required to pay PAYE Income Tax and Employees NICs – just like permanent employees.

Income Tax is due on all income you receive above the Personal Allowance (£12,500 – as long as you qualify for the full amount). The amount of tax you are required to pay will depend on your tax code and tax band you fall into – basic rate 20%, higher rate 40% or additional rate 45%.

You will also pay Employees NICs on your earnings. Employee’s NICs rates are 12% on income between £183 and £962 a week and 2% on income above £962.

Income Tax and Employees NICs are deducted from your wages by your umbrella company before you are paid. It is incredibly straightforward, and you do not have to worry about remembering to pay your taxes to HMRC.

Paying tax is something we all have to do

Unfortunately paying tax is something we all have to do, and no matter how tempting it is to increase your umbrella company take home pay – it is not worth it. We strongly recommend you only use compliant umbrella companies who are transparent about the tax deductions that will be made to your pay and provide an umbrella company take home pay illustration that includes them.

If you are looking for a compliant umbrella company – look no further than our top 10 umbrella companies!

Click here to see our top 10 umbrella companies!

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