HMRC Guidance on umbrella companies
In general an umbrella company is a company that employs temporary workers, (agency worker or contractor) on behalf of an employment agency. The umbrella company does not find work for the workers they employ, it is the employment agency that provides the services of those workers to their clients. Find out more about umbrella companies here.
We recommend that workers consider joining our pay-as-you-earn (PAYE) payroll, which is the most straightforward and transparent way to be paid.
If you choose to work through an umbrella company, it is important that you review providers carefully. Many of our clients require umbrella companies to be SafeRec accredited to meet compliance standards.
We therefore encourage you to check whether your chosen umbrella company holds SafeRec accreditation. If you are unsure about your current arrangement or would like guidance on your options, please speak to our team — we’re here to help.
Before engaging with any umbrella company, you should make yourself fully aware of the deductions that may be applied to your pay.
These can include:
• Employer’s National Insurance Contributions (ENIC)
• Umbrella company fees
• Employee National Insurance Contributions
• Income tax
You should ensure you fully understand these deductions before entering into any agreement.
If you choose to work through an umbrella company, the agency will pass the umbrella company the full costs of your assignment– i.e. the £16 an hour (from the funds the agency themselves has received from the end client). So when the agency explains to you that you can get £12.71 an hour if you are paid through them, or £16 an hour if you are paid through an umbrella company. The ‘headline’ rate of £16 an hour is intended to cover the total costs of employment and is not the amount you are going to personally earn!
As such it can be very tempting to go with the £16 an hour – however, the umbrella company should show all deductions that have been made in your payslip. If they don’t then please question this with them and, in our view, you should not be signing up to any umbrella company that does not provide a fully worked example, based on your own status.
If you are paid by an agency directly, then the rate it offers you (commonly known as the PAYE rate) is the amount, before your tax and NIC, which you should receive. So if you have a PAYE rate of say, £12.71 per hour and work 35 hours you will be paid £12.71 x 35 = £444.85 as gross taxable pay. You will then have your PAYE tax and employee NIC deducted from this. But £12.71 is not the true cost to the agency who is paying you. In addition, they may have to pay things like employers’ national insurance, holiday pay and contributions into a workplace pension. As such, the cost to them of taking you on may be something more like £16 an hour. But you aren’t entitled to be paid the full amount of £16 —you are only entitled to the £12.71.
Hopefully you are familiar with this concept from any other assignments you have been in. So the £16 per hour the agency receives from the client, out of this the agency has to pay the Employers NIC, holiday pay, and other statutory costs. What is left is the £12.71 that the agency pays you gross (before any workers tax is deducted).
