Working through an umbrella company guidance released by the government

To help contractors and freelancers who may require the services of an umbrella company, the government has released some official online guidance called ‘Working through an umbrella company’. Available on the official government website, the concise information is designed to help temporary workers understand how umbrella companies work and what they should expect to retain as their net salary. We’ve summarised the government’s guidance below, and we hope you find it helpful.

An overview

The official government guidance about umbrella companies was written by HM Revenue & Customs and was published on 29th April 2021. No longer than a 10-minute read, the information explains how umbrella companies work, including who pays the temporary worker, how the process works, what workers should expect to be paid (net salary), how to understand payments, and finally, the risks of engaging with tax avoidance schemes.

Who pays the contractor when an umbrella company is involved?

When you register with an umbrella company, you become their employee, and they’ll be your employer. As a result, you’ll be paid your net salary by the umbrella company. Umbrella companies operate HMRC’s tax system ‘Pay As You Earn’ (PAYE), meaning they’ll make the necessary deductions and send them to HMRC on your behalf.

How do contractors get paid when using an umbrella company?

Umbrella companies exist to employ contractors for payroll purposes. The client that you work for will pay your recruitment agency for the work you’ve undertaken. Then, the agency will deduct an amount for placing you in the role with the client. This is something referred to as the assignment rate. Your agency will then pass your funds onto the umbrella company, where more deductions will be made, including:

• The umbrella company’s margin
• Employer National Insurance Contributions
• Employment costs, including Employee’s National Insurance Contributions and the Apprenticeship Levy
• Pension (if you opt-in the umbrella company’s preferred pension provider)
• Student loan repayments (if applicable)

Regarding Employee’s National Insurance, HMRC state,

“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.”

How much will contractors be paid when using an umbrella company?

Usually, the rate an umbrella company pays you is referred to as the contract rate, and details on this should be explained in the employment contract you sign before officially becoming an employee of the umbrella. Your pay will usually be referenced as an hourly rate at the National Minimum Wage (NMW), with the rest being a taxable amount frequently labelled as a “bonus” or “additional pay”. This is your gross pay – before deductions have been made.

Please be warned – if you have ever seen an amount on your umbrella payslip that is described as not being subjected to tax – you may have enrolled in a tax avoidance scheme.

Your gross pay is subjected to PAYE deductions, as well as the additional deductions listed above. You will then be paid your net salary – the amount you retain and will have paid into your bank account by the umbrella company.

When using an umbrella company, you’ll notice holiday pay on your payslips. Holiday pay is calculated at 12.07% of your assignment rate, and you can choose to have it paid to you each payment frequency or accrued by the umbrella and paid to you in a lump sum at a later date.

Interpreting your pay from an umbrella company

Prior to engaging with an umbrella company, you should have been issued a Key Information Document (KID) from your recruitment agency. A KID is a document that umbrella companies produce to show contractors, freelancers and agency workers what they should expect to be paid should they decide to use their umbrella company.

Umbrella companies will issue employees with a reconciliation statement. As confirmed by HMRC, reconciliation statements “normally give a breakdown of the assignment rate received by the umbrella company from the agency which lists the umbrella company’s costs, including employer National Insurance contributions. These amounts should be deducted from the umbrella company’s assignment rate, not your contract rate.”

Every umbrella company employee will be issued a payslip for each payment frequency – showing the deductions to your gross pay. It will also show you your tax and NIC contributions made throughout the tax year, as well as your overall earnings. Every deduction that appears on your payslip should have been explained to you before registering with the umbrella, and everything should make perfect sense. Umbrella companies are not allowed to make any deductions unless they’re required by law, you agree to them, or they’re in your contract.

Tax avoidance schemes

Engaging with a tax avoidance scheme could land you in serious trouble with HMRC, even if you do so by accident. HMRC is urging contractors who think they’ve used a tax avoidance scheme to get in contact with them – to settle any outstanding tax affairs. By avoiding tax, “vital public services like schools and hospitals do not get all the money they need.”

If you ever come across an umbrella company or payroll provider that you believe is not following the UK’s tax rules and regulations, please contact HMRC and report them. More information is available here.

Churchill Knight has written a guide to help contractors identify tax avoidance schemes. HMRC has also released a guide that may useful: Tax avoidance schemes aimed at contractors and agency workers.

Read the official government guidance

To read ‘Working through an umbrella company’, the official government guidance, please click here.

Churchill Knight Umbrella

Founded by experts with over 20 years of industry experience, Churchill Knight Umbrella is an FCSA accredited umbrella company dedicated to compliance and customer service. Every week, we help thousands of contractors, freelancers and agency workers get paid on time and in accordance with HMRC rules and regulations. We prioritise offering reliable and honest advice from the initial consultation and take-home pay calculation to processing payroll.

To find out more about our service and request a free, tailored, and accurate umbrella company take home pay projection, please give our friendly team a call on 01707 871622, or click here to schedule a call back.