What is an umbrella company?
Umbrella companies are generally speaking companies that employ temporary workers (agency worker or contractors) commonly on behalf of and employment agency. Agencies will then usually provide the services of the worker to their clients. Umbrella companies do not find work for the workers that they employ.
There is some variety in how they work, but most umbrella companies employ workers using employment contracts which set out firm terms and conditions. This ensures the company complies with employment law.
It is generally agreed that an umbrella company is a company that employs a temporary worker (an agency worker or contractor), often on behalf of an employment agency. The agency will then provide the services of the worker to their clients.
Who pays who?
If you work for an umbrella company then they will handle your payments. They do this as they are your employer, meaning they will pay you for the work you do for the employment agencies clients and also deduct Income Tax and employee National Insurance contributions under PAYE (Pay As You Earn).
How will I get paid?
The client that you work for will pay the agency for your services – who will then deduct a fee for placing you with the client before paying the rest of the money to the umbrella company. This figure is commonly referred to as the assignment rate or the limited company rate.
This is slightly different than the rate you receive from the umbrella company, due to the additional costs incurred by them;
- administration costs (sometimes charged separately to you by the umbrella company)
- employer National Insurance contributions
- employer workplace pension contributions
- holiday pay
- other amounts to cover other specific costs, such as Apprenticeship Levy
The amount paid by the agency to the umbrella company will need to cover the costs of the employer National Insurance contributions. Umbrella companies use this money to pay employer contributions and not deduct the contributions from your gross pay.
What do I get paid?
The rate received from the umbrella company is referred to as your ‘contract rate’ and should be set out in your employment contract. Usually this will be an hourly rate at or above the National Minimum Wage plus another taxable amount described as ‘bonus’ or ‘additional’ pay. This is the gross pay before deductions.
If any of this sum is described as non-taxable then your umbrella company could be involving you in a tax avoidance scheme so keep an eye out. Your gross pay is also subject to deductions of Income Tax and employee National Insurance contributions through PAYE plus any other deductions like pensions.
The remaining amount is your net pay, the amount you take home.
By law, umbrella companies cannot deduct employer National Insurance contributions from your gross pay. If you believe contributions have been wrongly deducted from your gross pay or any other incorrect deductions have been made, then you should contact your umbrella company immediately. If this fails to resolve the issue then you should contact ACAS or your trade union representative.
Am I entitled to holidays?
You are entitled to paid statutory annual leave based off of the hours that you work, and if you leave the company with any annual leave still owed – they must pay you for it.
Umbrella Company Payslips
Payslips will include a separate breakdown listing of gross pay and deductions, including Income Tax and employee National Insurance contributions. Payslips must show:
- your pay (which is your contract rate) before and after any deductions
- the amount of deductions — these may change each time you’re paid, for example the amount of Income Tax and employee National Insurance contributions you pay depends on the hours you work
- the number of hours you worked, if your pay varies depending on time worked
Employer Deductions
Your employer is not allowed to make deductions unless:
- they are required by law
- you agree to them
- your contract says that they can
Umbrella Tax Avoidance Schemes
Most umbrella companies are compliant with the laws of the land, but some use tax avoidance schemes. This often catches employees in the crossfire.
Some umbrella companies will claim to let you keep more of your earnings than others, which suggests that they could be a disguised remuneration tax avoidance scheme. Alternatively, they could also include third parties.
Most tax avoidance schemes do not work and will end up being caught soon enough. Schemes that claim to be ‘tax efficient’ or offer increases on your take-home pay should be seen as red flags. Often these carry high, non-refundable fees and are often provided by, or through, offshore promoters.
If you are asked or ordered to sign an annuity, loan, or any other agreement involving a non-taxable element of pay (especially if this involves someone other than your employer) then it is likely to be part of an illegal tax avoidance scheme.
How to avoid being caught in a tax avoidance scheme?
The simplest way is to understand how you are being paid.
Checking payslips and contractual arrangements will help to confirm that you are meeting the right amounts of Income Tax and National Insurance contributions. This will help to avoid receiving an unwelcome tax bill in the future.
Checking your payslips and contractual arrangements will help you confirm you are paying the right
If you believe you are involved in a dodgy scheme, then you should contact HMRC as soon as possible so that they can help you out of it and settle your tax affairs. If you are caught using a tax avoidance scheme then you will end up having to pay all of the tax that is legally due plus interest and a possible penalty. This is on top of the fees you may have paid to the person or business that sold you the scheme.