As umbrella companies are in higher demand than ever before, we’ve created an umbrella example to help explain how the payroll businesses work, and how the supply chain interacts to ensure temporary workers are paid on time. Keep reading for more information, including access to our umbrella company example infographic.
An umbrella company example
In this example, we will refer to the following parties:
- A contractor called Ashley.
- A recruitment agency called Direct Recruitment Limited.
- An end-hirer called British Banking.
- An umbrella company called Brolly Payroll.
Ashley lands a new role
Ashley, a contractor who works in banking, finds a role through a recruitment agency called Direct Recruitment Limited. The role involves working inside IR35 for a bank called British Banking. The role is a 6-month contract that involves 40 hours of work per week.
Payroll needed through an umbrella company
British Banking does not process the payroll of its temporary staff and Direct Recruitment Limited do not offer in-house agency PAYE. Therefore, Ashley is required to use the services of an umbrella company for payroll purposes.
Choosing an umbrella company
Ashley is given a list of umbrella companies that Direct Recruitment Limited recommend. This is referred to as the agency’s Preferred Supplier List (PSL). Having gone through the list, Ashley selects an umbrella with a competitive margin and a reputable accreditation – Brolly Payroll. It’s extremely important that Ashley opts for a compliant umbrella company because failure to pay the correct taxes and national insurance contributions could results in severe penalties from HRMC in the future.
Opting to use Brolly Payroll
Ashley rings Brolly Payroll and explains the role they have landed through Direct Recruitment Limited working for British Banking. The salesperson at Brolly Payroll runs through the umbrella company process and Ashley decided to go ahead. At this point, Ashley needs to let his agency know which umbrella they have chosen to register with – and we explain why later.
Registering with Brolly Payroll
To register with Brolly Payroll, a compliant umbrella company, Ashley needs to provide multiple pieces of personal information, including name, address, national insurance number, bank details, assignment information, end-client information, and more.
Once the initial registration process is complete, Brolly Payroll requests that Ashley sends them an up to date P45, or completes the online New Starter Checklist. This will ensure the correct tax code is used and Ashley’s pay is processed accurately.
Brolly Payroll also sends Ashley a Contract of Employment which outlines all the terms of using the umbrella company. By registering with Brolly Payroll and becoming an employee, Ashley has access to employee rights, free insurance, as well as a host of other small perks.
Timesheets
To ensure the whole payroll process goes smoothly, Ashley is required to submit signed timesheets to Direct Recruitment Limited and Brolly Payroll. This will allow the agency to invoice the end-hirer for the correct amount, and for the umbrella to invoice the agency correctly too.
Agreement signed between British Banking (end client) and Direct Recruitment Limited (recruitment agency)
For Ashley to be paid on time, payments need to be passed down the supply chain. As a result, an agreement is signed between British Banking and Direct Recruitment Limited. When Ashley submits signed timesheets, the appropriate funds (assignment rate) will be paid to Direct Recruitment Limited by British Banking.
An agreement between Direct Recruitment Limited (recruitment agency) and Brolly Payroll (umbrella company)
Once Direct Recruitment Limited has received Ashley’s funds from British Banking, they are passed to Brolly Payroll (gross). Both parties will have an agreement in place to ensure things run smoothly and legally.
Brolly Payroll processes Ashley’s pay
Now that Brolly Payroll has received Ashley’s pay from Direct Recruitment Limited, they can make the necessary deductions before paying Ashley their net salary straight into their personal bank account.
The deductions are made in accordance with Pay As You Earn (PAYE) – HMRC’s tax system. The deductions that Ashley will see on their payslip include income tax, employee’s national insurance contributions and employment costs (apprenticeship levy and employer’s national insurance). Ashley is also repaying a student loan and therefore, the monthly deduction will also be taken from their pay and highlighted on the payslip.
Top 10 umbrella companies
If you’re interested in using the services of a compliant and trustworthy umbrella company, we have just the thing that will help you. We have collated a list of our top 10 umbrella companies, and we recommend you check them out. All of our top 10 are accredited by either the Freelancer and Contractor Services Association (FCSA) or Professional Passport, and some have special offers at the moment.
