What is an umbrella company and why must I use one?

  • What is an Umbrella Company?
  • Why must I use an Umbrella Company?
  • How is my rate of pay calculated?
  • How is my holiday pay calculated?
  • Can I claim some relief on my expenses?

What is an Umbrella Company?

An umbrella company is a company that employs contractors to carry out temporary assignments as their own employees with continuous contracts of employment. Their sole purpose is to employ people like you and the umbrella must pay you for 336 hours of work per year at the minimum wage.

Workers are paid PAYE income in the same way as every other employee.

Why must I use one?

Historically, if you worked through an agency, that agency would usually have paid you themselves. With the introduction of Off-Payroll Working many organisations have since insisted that workers deemed to be ‘inside IR35’ move to either PAYE through the recruitment company or operate through an umbrella company.

Many recruitment companies do not operate their own Pay As You Earn (PAYE) arrangements for their contracting workforce and in these cases, they will rely on umbrella companies. When an agency passes you over to any umbrella company, they should ensure they also provide sufficient funds to cover all the employment costs that the umbrella company will now have to bear, including the amount to cover the umbrella company charge. The umbrella firm becomes your employer, so they will deal with your pay and other employer obligations instead of the agency. This includes paying your wages with tax and National Insurance (NIC) deducted as required by the PAYE system.

How is my rate of pay calculated?

This is an area where many contractors new to umbrella companies become confused.

The rate paid to the umbrella company is not the rate you get paid.

If you are paid by an agency directly, then the rate they offer you (commonly known as the PAYE rate) is the amount, before your tax and NIC, that you should receive. But this PAYE rate is not the true cost to the agency of paying you. In addition, they have to pay employers’ NIC, holiday pay, apprenticeship levy and contributions into a workplace pension. As such, the real cost to them of taking you on may be significantly more.

When the agency contracts with an umbrella company, and you are employed by the umbrella company, they should pass the umbrella company the full costs of your employment –that is, the PAYE rate plus all the associated employment costs (from the funds they themselves have received from the end client). They will often uplift the rate to also cover the margin cost of the umbrella company. This is commonly known as the limited company rate, or uplifted rate. Where the rate has been uplifted correctly, your take home pay from the umbrella company should be no less than you would receive had you been on agency PAYE.

If you have a PAYE rate and an uplifted rate provided by your recruitment company many responsible umbrella providers will produce a pay comparison for you.

It is also worth noting at this point that all umbrella companies must operate within the same tax rules and therefore there should be very little difference between the take home pay you are offered. Should you be offered significantly more take home from a provider beware as this could result in HMRC coming after you later for unpaid taxes. If that were to happen you would end up with less overall than if you had paid the correct taxes in the first place.

How is my holiday pay calculated?

Generally, umbrella companies will provide 28 days holiday as part of the employment contractual terms. This is one of the costs that is covered in the uplifted rate provided to the umbrella company.

This equates to 12.07% of your gross taxable pay and should include both salary and any bonus element of your pay.

Umbrella companies will retain this money to pay to you when you are either on holiday or not working, although most contractors prefer to have this paid to them immediately. If that is the case, you will be asked to confirm your request in writing before this process is applied. You must remember that were you to request advanced holiday pay this will mean that you have no funds held back for times where you are on holiday or out of work. You can change it back at a point in the future should you wish.

Should you decide to have the umbrella retain the holiday and pay it out on request. you must make sure that you understand the ‘holiday year’ that the umbrella operates. All companies, not just umbrella companies, have a ‘holiday year’, for example January to December, and you must take any holiday entitlement during that year or it is lost. So, you must ensure you request all your entitlement before the end of the holiday year.

Can I claim some relief on my expenses?

There are 2 types of expenses that can be claimed:

  1. Those that are paid from your normal, or general, earnings
  2. Those where the agency / end client reimburses you

In the case of those you wish to have reimbursed from your general earnings, and keeping things as simple as possible, these tend to only be mileage allowances to temporary workplaces, i.e. not the normal site you visit. If you have other allowable expenses such as train fares or subsistence, these must now be claimed through your Self-Assessment Tax Return.

Agency reimbursed expenses, where the money is additional income and not general earnings, typically where you claim specific costs incurred, can cover any category of expense, as long as it is to a temporary workplace and wholly, necessarily and exclusively for business.

Your umbrella is likely to require a detailed expense claim form from you as well over and above the one submitted to the agency. This is simply because the umbrella must demonstrate to HMRC why the expenses are allowable for tax purposes, something the agency/end client doesn’t have to do.

If you feel you are likely to have either category of expenses, it is worth discussing this at the outset with your umbrella to ensure they can accommodate these and you are aware of their processes for claiming.

You will also find many useful articles and videos on the Professional Passport website in the Hot Topics section.
Why not use our Umbrella calculator and take a look at the Net Pay you could be taking home when you join Social Work Employment Services?

Let us show you the Net Pay you could be taking home when you join Social Work Employment Services with the umbrella company calculator.

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