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What is an Umbrella Company?
An umbrella company acts as an employer for contractors who don’t want to deal with the administration of being self- employed, or who are not able to utilise a personal service company.
The umbrella company is a single, continuous employer through multiple assignments or projects, with end clients or agencies. The umbrella company will engage the employee under a full overarching contract of employment. This means that they operate PAYE and the individual will be entitled to statutory employment rights.
The traditional umbrella model caters to skilled workers who opt to be employed through an umbrella company rather than trading through a limited company. These individuals will work on a succession of assignments where their skills are required for specialist projects.
What is my employment status?
Contractors working through an umbrella company are permanent, full-time employees under a contract of employment. Although you work on temporary projects or freelance work you are employed for tax purposes. The umbrella takes care of applicable taxes and administration on your behalf.
What’s an overarching contract of employment?
An umbrella company operates an over-arching contract of employment, as a required by the taxman. In order for a contract to be overarching there must be:
- Mutuality of obligation over the duration of the employment
- A guaranteed number of hours work offered in any 12 month period
- A provision for holiday pay as workers have the right to paid leave under the working time regulations
An overarching contract gives continuity as you effectively become a permanent employee of the umbrella company.
How does an Umbrella Company calculate my take home pay?
All UK Umbrella Companies must operate PAYE and make National Insurance deductions. You will pay taxes in the same way that a permanent employee does.
As all umbrellas operate under the same rules and regulations, there is are no special offers available or creative payments. Your pay should be roughly the same, with the only variable being the margin for using the umbrella service.
All UK taxpayers have a tax code which determines the amount of pay that is tax-free. For 20/21 the tax code is 1250L which means that the first £12,500 of earnings do not suffer PAYE deductions (This amount is pro-rated over the year in line with how you are paid i.e. Weekly or monthly). Every pound earned over the personal allowance is taxed at 20% up to £50,000 and then 40% up to £150,000 and 45% for any earnings over £150,000.
Why am I paying Employers NI?
All UK Umbrella Companies, as employers, are required by law to pay employer’s national insurance contributions to the HMRC, and in some cases the apprenticeship levy too. These contributions are made from the funds received from the recruitment agency or client for services received. The contract rate that you negotiate is not your salary until employers NI, apprenticeship levy and the umbrella margin are deducted.
In most situations the rate that you are offered to work through an umbrella contract will account for this and be higher than if you were engaged directly with the end client. Bear in mind that if you were to accept a role with the same rate of pay as a permanent member of staff, you would actually be taking home less.
How much money can I expect to take home?
Your take home pay will depend on several factors, but as a general rule you will receive between 60% and 75% of the contract rate, depending on your rate, as higher income means higher taxes.
All compliant umbrella companies will deduct the required taxes in the same way so your take home pay will onlyvary by the margin charged for the service.
Prior to April 2016 you could claim expenses to reduce the amount of tax deducted. However, the HMRC restricted this as part of an anti-abuse measure and it is no longer possible.
Any “umbrella” provider promising up to 90% take home pay is most likely to be a contractor loan scheme. HMRC are clear that they regard such schemes as tax avoidance.
How and when will I be paid?
Your salary will be paid directly into a UK bank account. Once we receive funds from your agency or end client, we will process the pay run and pay you. If the funds are received in our bank account by 1pm youwill be paid the same day.
Once your payment has been made you will receive a text message, and your payslip will be available online.
What about pension?
As a UK employer, your umbrella company is legally required to provide you with access to a workplace pension scheme. To help all of us to save for our retirement, automatic enrolment has been introduced by the Government. This means that employers have to enrol all eligible employees into a workplace pension.
All pension contributions are funded from the contract rate that you are paid. The minimum contribution for the current tax year is 8%. Once you’re auto-enrolled, the umbrella company will collect a percentage of your income and place it into a workplace pension scheme on your behalf.
How an Umbrella Company works
- You will sign an overarching contract of employment with the umbrella company
- The umbrella company will sign a business-to- business contract with the client or recruitment agency
- You will complete a timesheet for hours/days worked for the umbrella company, and use the required system for logging your time with the agency
- The Client (who will be engaging your services) authorises the agency timesheet, which will confirm to them the hours/days that you have worked
- The Umbrella Company will raise an invoice to the Agency for the work you have done plus any expenses that the client has agreed to reimburse
- The Agency invoices the Client for work completed plus any chargeable expenses
- The Client pays the Agency
- The Agency pays the Umbrella Company. The date will be determined by the Agency’s payment schedule
- The Umbrella Company processes the payment and any chargeable expenses and deducts thenecessary PAYE and NI contributions. You receive payment of salary into your personal bank account and are notified of paymentYou will receive your payslip showing the rate of pay and deductions suffered
What is my IR35 status?
As a contractor you would likely have heard of IR35. This is legislation designed to stop ‘disguised’ employees working through their own limited company to gain a tax advantage.As an umbrella company contractor, you are a permanent employee, that is paid salary through the PAYE system, allowing for all applicable taxes. You are outside the scope of IR35.
As our employee, you’ll be covered by the following insurances:
- Employer’s Liability insurance, up to £10 million
- Public Liability Insurance, up to £5 million
- Professional Indemnity Insurance, up to £5 million
All our employees are covered by our insurance at no additional charge.
You are legally entitled to holiday pay. Since April 2009 all PAYE employees are entitled to 5.6 weeks paid holiday each year. This equates to 28 days.
It would not be financially viable for the umbrella company to fund this holiday entitlement, so it is funded by the contractor.
The percentage typically used to work out holiday pay is 12.07% of your hourly rate > 5.6 weeks / (52 weeks – 5.6weeks) = 12.07%
Under the terms of the Working Time Regulations (WTR), holiday pay cannot be included in basic pay, so all umbrella companies are obliged to show each element of pay as a separate entry on your payslip.
Each time you are paid, holiday pay will be deducted and taxed, but this money remains yours.
Your holiday pay can be ‘paid in advance’ on a weekly or monthly basis in line with your basic pay. This means that there would be no pay for when you take time off. Alternatively, you can decide to ‘accrue’ your holiday pay, which means it would be set aside to be paid when time is actually taken off. The amount to be paid would depend on the monies available in your holiday pot.
Our system will allow you to see any holiday you have accrued. Any unused holiday pay will be refunded to you when you leave.
What are the benefits of choosing No Worries Umbrella?
No Worries has been working with contractors since 2006 – and in that time we have learnt a lot about making our contractors lives hassle free. Great service and happy contractors are key to all of our offerings. With No Worries Umbrella you get:
- A user-friendly online portal to access any time, anywhere.
- Quick and easy timesheets.
- All emails will be answered within the working day.
- All calls answered by a member of our helpful team.
- A dedicated point of contact for the duration of your employment with us, so you can speak to the same person each time you call.
- We run payroll daily (on working days) and will pay you the same day the funds clear into our account.
- You are covered by our insurance.
- You can submit both timesheet and expenses information through our online portal.
- We invoice your agency or end client the same working day as you raise your timesheet.
- No administration hassles. Just raise your timesheet and get paid.
Contacting through your own limited company involves a higher element of administration and effort, however the net pay benefits can often make this an attractive option. For more information take a look at our No Worries limited company service for contractors.