On the 3rd of December 2024, HMRC released an umbrella company calculator that contractors, employment bodies and recruitment agencies can use to get a detailed understanding of take-home pay through an umbrella company.
Over the recent years, HMRC has really stepped up its efforts to support temporary workers and organisations that engage with umbrella companies. How? By releasing several pieces of online guidance explaining how compliant umbrella companies operate, and how to identify non-compliant umbrellas (tax avoidance schemes).
For example, have you read the following government guidance?
- Working through an umbrella company – https://www.gov.uk/guidance/working-through-an-umbrella-company
- Current list of named tax avoidance schemes, promoters, enablers and suppliers – https://www.gov.uk/government/publications/named-tax-avoidance-schemes-promoters-enablers-and-suppliers/current-list-of-named-tax-avoidance-schemes-promoters-enablers-and-suppliers#if-youre-involved-in-a-tax-avoidance-scheme
- Check how to reduce your risk of using an umbrella company who operates a tax avoidance scheme (aimed at recruitment agencies) – https://www.gov.uk/guidance/agencies-and-other-businesses-using-umbrella-companies-who-may-be-operating-avoidance-schemes
- Check if you are at risk of tax avoidance – https://www.gov.uk/guidance/check-if-you-are-at-risk-of-tax-avoidance
The latest umbrella company guidance – a new HMRC built umbrella company calculator
The new HMRC umbrella company calculator (Work out pay from an umbrella company), published on 3rd December 2024, is available for you to use now. Please click here to give it a try.
What questions must you answer to be presented with your net pay calculation?
Hats off to HMRC – their new calculator appears to cover most of the key areas when it comes to take-home pay with an umbrella, including the assignment rate, taxes, employment costs (including the Apprenticeship Levy – which has an explanation) and pensions/student loans.
If you don’t have the time to use the tool yourself (available here), here are the questions you need to answer before being presented with your net salary calculation.
- Identification – Choose whether you’re an umbrella company employee, or represent an employment business or recruitment agency.
- Assignment rate – Enter the assignment rate. There are options for hourly or daily.
- Working Circumstances – Submit the number of days you work in a week. You will then need to enter the number of hours you work in a standard week (e.g. 37.5).
- Payslip – HMRC’s tool allows you to upload a payslip. While testing, we didn’t utilise this option and selected “no” to the question – “Do you have a payslip”.
- Margin – You’re asked to provide the umbrella company’s margin. If you don’t know it, you can choose this option. The margin field allows you to enter a weekly or monthly umbrella company margin.
- Pension – You will be asked whether you’re enrolled in a workplace pension scheme. You can select “Yes”, “No” and “I do not know”. Remember, as your employer, umbrella companies are legally required to enrol you into a workplace pension, but you can opt out (usually by contacting your umbrella or directly contacting the workplace pension provider).
- Location – Three options for location appear – England or Northern Ireland, Scotland or Wales.
- Tax Code – If you know your tax code, you can enter this into HMRC’s tool. We used 1257L – the standard tax code.
- Apprenticeship Levy – You are asked to enter whether or not the umbrella company you are using pays the Apprenticeship Levy. Most umbrella companies will pay the Apprenticeship Levy as they have hundreds of employees (contractors and freelancers) using their service. If you’re unsure, you can select “I do not know”, or contact your umbrella for confirmation.
- Loans – Do you pay back a student loan or postgraduate loan? You can select these options, or specify that you are not making any repayments.
- Verification – The tool requires you to check your responses before continuing. The tool uses a series of assumptions when creating your calculation (which states estimated net take-home pay with an umbrella). The assumptions are listed below.
- Results – When you have completed all the sections on the tool, you’re presented with your results. These show the assignment rate, umbrella company margin, Employer National Insurance Contributions, Apprenticeship Levy, Gross pay including rolled-up holiday pay, (employment costs – Employee income tax and Employee National Insurance), and finally, your net pay (including rolled up holiday pay).
What assumptions does the HMRC umbrella take-home pay tool use?
When using the online tool, before you’re presented with your figures, you are given a list of assumptions that the tool takes into consideration. These are:
- Weekly pay reference periods pension contributions.
- Weekly thresholds for employer and employee category A National Insurance contributions.
- Weekly thresholds for student loan repayments, rather than monthly or any other pay reference period or threshold.
- Employer and employee category A National Insurance contributions, which applies to most employees, but doesn’t cover employees under 21 and over State Pension age.
- Relief at source (RAS) to work out pension contributions, assuming minimum employer and employee contributions on qualifying earnings, rather than a net pay arrangement (NPA) or any other contribution basis.
- Income Tax calculations that assumes earnings are consistent over the tax year.
- The default 1257L tax code where the tax code is unknown and gross earnings are lower than £100,000 per year – if a tax code is different to this, then the umbrella company will deduct a different amount of Income Tax from pay.
- Holiday pay using the rolled-up method, where an additional amount is included in every payslip to cover a worker’s holiday pay, rather than using the 52 week reference period.
- No allowances on Apprenticeship Levy that the umbrella company might have, which would result in a lower Apprenticeship Levy deduction.
- The tool does not include items such as expenses or other deductions that you have agreed to or are legally required to pay, but which can appear on your payslip and affect your gross or net pay.
For more information, go to the tool and see how it works for you. It’s free and easy to use, and you should get your net pay figure in a few minutes.
What do we think of HMRC’s umbrella company calculator?
Any advice for contractors, freelancers, and supply chain members regarding umbrella company compliance is welcome. Therefore, we’re delighted that HMRC has released an umbrella company calculator, which requires several pieces of information to be submitted for a detailed net salary calculation.
Here are some points we’ve taken by the release of this calculator:
- HMRC is providing ongoing support for umbrella company users and engagers – designed to promote compliance and transparency. This is great to see.
- The calculator only takes a few minutes to use – which makes it very user-friendly. When running tests, we didn’t upload any payslips. However, this option should be utilised if you have an umbrella payslip to hand.
- The new HMRC umbrella company calculator acknowledges how umbrella companies should be operating, and uses correct terminology (such as “assignment rate”) and explains the deductions to consider for the employment costs.
- While there is still no HMRC definition for an “umbrella company”, this calculator provides clarity over how the government expect contractors and freelancers who engage with umbrellas to be paid. HMRC have not said anything about their “love” or “hate” for umbrellas, but at least they acknowledge how compliant umbrella companies should be operating.
- Any contractor, freelancer or organisation within the supply chain of temporary workers should use the calculator to get an understanding of how it works, what deductions are applicable to the “assignment rate” and to get a feel for compliant umbrellas.
- There are many factors that will impact your take-home pay with an umbrella and there is a realistic chance the HMRC calculator will provide you with a different figure to your actual take-home pay (stated on payslips). Therefore, we advise that anyone who uses HMRC’s calculator doesn’t take the net take-home pay figure as gospel. Instead, use it as an accurate indication of your expected estimated pay.
What do think of HMRC’s new tool? Please share your comments below.
Have you seen our top 10 umbrella companies?
Are you interested in using an umbrella company you can genuinely trust? We have created a list of our top 10 umbrella companies, and they’re all accredited by either the Freelancer and Contractor Services Association (FCSA) or Professional Passport. A few of our top 10 are also SafeRec certified, which is a fantastic addition to the sector as it allows contractors to access real-time payslip audits – for complete peace of mind. Please check out our top 10 umbrellas here.
