Working through an umbrella company: how does it work?
With more and more people in the UK opting to work on a contractual basis, umbrella companies have gained popularity. And while it is an excellent option for people who want to avoid the administrative burden, some things about working through an umbrella company could be confusing and downright annoying.
Let’s find out in more detail how and what it is like working through an umbrella company?
What is an umbrella company?
An umbrella company basically acts as an employer for individual contractors who work on fixed-term contracts. The company takes care of all the bookkeeping facets and collects your salary (earnings) from your client while you work. They will also deduct tax, company fee, and national insurance contributions and pay you the remaining sum. It might feel like working as a full-time employee, but most contractors prefer this option since they take care of your accounting and bookkeeping. This is especially true for first-time contractors.
Who pays you?
Since you are working for the umbrella company as their employee, they will pay you. An umbrella company will:
Pay you for all the work you’ve done for their clients.
Deduct any employee National Insurance contributions remaining under PAYE (Pay As You Earn) and Income Tax from your salary/pay.
How do you get paid?
The client you’re working for pays the agency for your services. Once they receive the amount, the agency will deduct their fee (tying you with the client) and pay the remaining amount (also called the limited company rate or assignment rate) to the umbrella company.
The assignment rate is different from what the umbrella company will pay you since it contains extra costs like:
Holiday pay
Employer National insurance contributions
Employer workplace pension contributions
Administration costs
Other amounts like Apprenticeship Levy
The rate that the agency pays to the umbrella company must include the employer National Insurance contributions. Then, the umbrella company will use the amount to clear employer contributions and not take off the contributions from your total amount.
What do you get?
The umbrella company pays you the contract rate, which must be mentioned in your employment contract. It generally is the hourly rate as cleared by the National Minimum Wage with a taxable amount called the bonus or additional pay. The total amount is your gross salary (prior deductions).
If your umbrella company states any amount in your gross salary as non-taxable, they might be including you in some tax avoidance scheme.
Your gross salary will then undergo deductions that include employee National Insurance Contributions and Income Tax through PAYE. On top of that, it will also include other subtractions like workplace pension contributions.
The amount that remains at the end is what you take home.
Understanding what you get paid
In the beginning, the employment agency will give you a key information document that contains details about your salary and wages. Usually, an umbrella company will provide a listed reconciliation statement along with a payslip.
Key Information document
An employment agency will provide you with a key information document that will inform you about your salary and your employment. It contains details about your deduction and fees regarding the project and contract rate and their impact on your pay.
The document should clearly state what the agency will pay the umbrella company and what the umbrella company will pay you (contract rate).
Reconciliation statement
The reconciliation statement will generally break down the project rate that the umbrella company gets from the agency. It will show the umbrella company’s costs that include employer National Insurance contributions. The agency must deduct these costs from the umbrella company’s assignment rate only.
Payslip
Your payslip must show the deductions and your gross salary. The deductions must include employee National Insurance contributions and mention what you get at the end.
The payslip must mention these:
Your contract rate prior and post deductions.
Total deductions
Total hours you have worked
Concluding note
Working through an umbrella company is a viable option, given that the company is legit. Understand all the legal formalities before signing anything and move away from any tax avoidance schemes because they are illegal. If your umbrella company is indulging in illicit activities, inform the authorities immediately.
