Understanding how Umbrella Companies Work
When being paid directly by an Agency/Employment Business, you are offered a rate which is referred to as the PAYE rate. This rate will be a figure before any PAYE income tax & Employees national insurance.
For example:
If your pay rate is £10.42 p/h (NMW) and you work a 35 hour week.
£10.42 x 35 hours = £364.70 gross pay.
You will then have your PAYE income tax and Employees national insurance deducted from this figure (gross pay).
When working with Agencies/Employment Businesses, this will not be the true cost as there are other factors to consider such as holiday pay, employers national insurance, apprenticeship levy and employers pension contributions. The hourly rate of £10.42 p/h (NWM) would in fact look something more like £13.30. This is the part where people seem to get confused, they think they are then entitled to the full amount of £13.30 when it is still only the £10.42.
Working via an Umbrella Company
If you choose to work through an umbrella company, the Agency/Employment Business will pass the full assignment costs they receive from the end client to the umbrella (£13.30 from example above).
Payslips
You should always receive a payslip explaining your pay and a reconciliation statement showing any deductions that have been made.
The reconciliation statement should detail the following deductions which have been made. The figure after these deductions is then your gross pay.
- Umbrella Company operating costs (sometimes called ‘margin’)
- Employer National Insurance Contributions
- Employer Workplace Pension Contributions (if applicable)
- Holiday Pay
- Apprenticeship Levy
The Umbrella company will then deduct the following, from your gross pay (this will be shown on your payslip)
- Income Tax
- Employee National Insurance Contributions
- Employee Workplace Pension Contribution (if applicable)
- Student Loan Repayments (if applicable)
- Other deductions that you have agreed to or are legally required to pay
Your pay after these deductions is then known as your net pay or ‘take home pay’ (what you will physically receive into your bank account)
If you have any issues with your pay, or don’t understand the deductions speak to your Umbrella Company and ask them to explain this to you in more detail or read more on the gov website here:
https://www.gov.uk/guidance/working-through-an-umbrella-company
